Sales Tax Essential to Multichannel Integration Strategies

3/19/2013
Anyone who works in, around or near the retail industry will tell you that the past decade has brought a variety of paradigm shifts in the industry. From the rise of e-commerce, the growth of multichannel retailing and the meteoric rise of some brands contrasted with the fall of others, the retail industry has developed at an unprecedented pace.

The impact of these shifts in the retail industry is especially evident in the evolution in consumer buying habits and its impact on retail selling channels. Indeed, a recent comScore report that shows that "online retail spending reached $43.2 billion" in the second quarter of 2012, "the eleventh consecutive quarter of positive year-over-year growth and seventh consecutive quarter of double-digit growth."

Today, retail channel options include traditional brick-and-mortar stores, kiosks, e-commerce sites, mobile devices, self-service, catalogue, call centers, social media, and other hybrid channels. Retail channels are expanding everyday due to consumers' ability to instantly access information through web-enabled technologies. With the number of channels expanding, retailers have the opportunity to increase visibility, awareness and sales revenue.

These shifts in consumer buying habits have forced retailers to change how they manage the multichannel retail environment. Now, retailers must effectively integrate these channels to respond to consumer behavior and demands and help to create a seamless buying experience.

However, supporting the combined use of purchase channels presents retailers with a complex sales tax process. The most pervasive sales tax implication to multichannel expansion is related to the overall increase in sales tax collection responsibility. Many retailers that operate brick-and-mortar stores and e-commerce platforms have experienced significant sales tax compliance challenges. As retail channels continue to evolve and become increasingly integrated in the eyes of the consumers, retailers will face an increasingly complex sales tax compliance environment.

Effectively managing sales tax compliance is essential, as it not only helps retailers to stay current with the ever-changing sales tax rates and regulations but also aids in remaining compliant, which ultimately helps ensure a positive consumer experience. For that reason, retailers that are expanding their multichannel purchasing options, as well as those integrating existing channels, should consider the following integration strategies to address specific sales tax compliance challenges.

Integration of information access
Integration of information access refers to the customer's and retailer's ability to access and share information across multiple channels. From a sales tax perspective, integration of information access refers to the ability to accurately and consistently calculate sales taxes across all channels. Many channels in a multichannel retail environment are supported by single-channel systems. For example, the order system for e-commerce transactions may not be the same as the system used for point-of-sale.

Therefore, independent transaction systems must be capable of calculating sales tax with methods that often require referencing information across alternative channels. In order to maintain consistency and accuracy in sales tax calculation, retailers must adopt a uniform sales tax interface as orders pass through integrated systems during the order cycle.

Integration of order fulfillment
Integration of order fulfillment refers to cross-channel logistical support and fulfillment services. Integration of order fulfillment creates a variety of sales tax challenges primarily associated with the ability to determine the physical origin of the order at the time of purchase. The physical origin of merchandise becomes a critical component for sales tax determination, especially in jurisdictions where sales tax is determined by the origin of purchase. As the integration of order fulfillment becomes more sophisticated across multichannel retail environments, the application of jurisdiction-specific sales tax rules to handle this complexity will become increasingly important.

Integration of customer service
Integration of customer service deals with cross-channel customer service support. Initiatives designed to integrate customer service may include creating flexibility in post-purchase activities such as supporting merchandise returns and exchanges. For example, merchandise purchased online may be returned to a local store, which presents a challenge when calculating, recording, and reporting the appropriate sales tax refund. The transaction may be further complicated if each channel operates within single-channel systems.

As retailers continue to implement new purchase channels, they will face challenges in the management of tax risk and compliance. The three compelling strategies outlined here — integration of information access, order fulfillment and customer service — are strong arguments for implementing an enterprise tax automation solution to eliminate risk when operating a multichannel purchase environment.

For retailers, the coming years are likely to bring continued challenges in how to reach consumers and secure a larger wallet share. What is certain is that the channels in how they are reached will evolve and become increasingly integrated. At the same time, retailers will also have to deal with the increasingly complex sales tax environment associated with multichannel integration. It's important to understand that proactive management and automation of sales tax will prove to have a significant impact on the bottom line.

In an industry that's seeking new and better ways to maximize profits, reduce compliance and audit risk, and offer a consistent and seamless experience for consumers, this is perhaps the most compelling reason of all to automate the tax process.

Brandon Wells is senior solutions manager in the Retail Consulting Practice of Vertex Inc., a provider of corporate enterprise tax solutions.
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