How selling through multiple channels impacts your sales tax obligations

Fast-forward to now and digital channels continue to dominate. FIS Global found that 58% of consumers surveyed are buying more online as a result of COVID-19. Events have gone virtual and remote working is still par for the course for many. Both direct-to-consumer (D2C) and business-to-business (B2B) ecommerce sales are at all-time highs. International ecommerce sales are growing at double the rate of domestic ecommerce sales. A study by Sapio Research and ClearSale found that more than half of consumers make online purchases from international sellers on a regular basis.

One lasting impact of the pandemic may be the acceleration of multichannel selling. More businesses are realizing they need to align their channel strategy with how customers want to research and buy products today. It’s paying off: Businesses that sell through multiple channels generate 190% more revenue than those that sell through a single channel.

And it’s not just retail. B2B and D2C sellers have growth opportunity here too. According to Forrester research, 73% of B2B buyers find buying through ecommerce, web direct, or marketplaces convenient. A McKinsey study yielded similar results. Furthermore, Forrester found that 68% of B2B buyers start their journey digitally before speaking with a salesperson and 71% do this before selecting a vendor. Gartner predicts that by 2023, 75% of B2B procurement spending will be via online marketplaces.

Many private label manufacturers are also pivoting to multichannel selling. The Harvard Business Review found that some brands like PepsiCo are starting to sell directly to consumers while others like L.L. Bean are expanding into indirect channels through partnerships with retailers and marketplaces. Influencer channels such as social, affiliates, and partners are more prevalent as well; Forrester reports 70% of global revenue now comes from third-party channels.

Keep in mind that with the addition of new sales channels come new sales tax obligations. As you rethink sales channels and revamp operations to reach more customers, it’s critical to factor tax compliance into your strategy and planning.

When you add or expand sales channels, your customer base becomes larger and more geographically dispersed. This can impact how you manage tax compliance depending on where customers are located.

For U.S. sellers, that can mean changes to nexus — the connection to a state or local jurisdiction that obligates a business to collect and remit sales tax. Historically, nexus required having a physical presence in the state, such as a store or warehouse. Over time, states extended sales tax nexus to common business practices such as employing remote staff, attending trade shows, and using drop shippers or third-party fulfillment services.

In June 2018, a landmark decision by the United States Supreme Court in South Dakota v. Wayfair, Inc. gave states the right to enforce economic nexus, requiring remote sellers to collect and remit sales tax if sales into the state exceed certain sales volume or revenue thresholds. Today, all but one of the 45 states with sales tax have economic nexus laws in effect. Nexus thresholds vary by state. Many states use $100,000 in sales or 200 transactions as the standard. However, some states have higher or lower thresholds. Several states including Alabama, California, and Massachusetts base economic nexus on sales revenue only. Kansas has no thresholds — any remote sales into the state trigger economic nexus. Some states include exempt sales and services in their thresholds.

Under these new rules, it’s easy for even a small retailer, or manufacturer new to selling direct, to exceed nexus thresholds in one or more states. The chart below illustrates how easy it is for a new tax nexus obligation to be triggered by multichannel selling.  

Economic nexus is based on your total sales into a state. When you sell to buyers through multiple channels, you’re more likely to meet or exceed the thresholds in that state. Digital channels like ecommerce, online marketplaces, and social media are probable triggers because your customers could be located anywhere. So, it’s possible that even if you didn’t have to register to collect sales tax in a state previously, growth in remote sales could mean that you do now. And this is true for every state where your sales give you economic nexus. 

The example below shows how aggregating your sales data from various channels could add up to economic nexus if total sales into the state now exceed revenue or transaction volume thresholds. You’ll need to determine if you’ve triggered economic nexus for every state where you’re now selling to customers through multiple channels.

Deciding to sell through new or additional sales channels can change tax compliance for your business. New obligations can result from one channel’s activities or, more likely, some combination of channel activities.

Consider the following examples:

Once you have a clear understanding of how multichannel sales can change your sales tax obligations, you’ll want to set up your business to address them properly. How will you handle growth going forward without adding risk? You first need to have clear visibility into your sales operations. Aggregating sales data ensures you have a complete and accurate record of all your transactions. A “single source of truth” simplifies and streamlines compliance so you’re aware of where you have nexus and can determine what tax rates and rules apply to each transaction. This is where a tax automation solution like Avalara can make a difficult job easier by lessening the work and burden of getting sales tax right.

Avalara tax automation solutions are designed to integrate seamlessly with your existing business software and systems to give you a 360-degree view of your sales transactions and make it easier to stay on top of your tax obligations, even as your business changes. Avalara affords you the ability to automate the entire tax compliance process — from registration to rate calculation to returns filing — with one solution suite. This helps optimize the efficiency and profitability of your multichannel sales strategy.

Channel sales are tightly tied to tax compliance, so when one changes, it directly affects the other. So, the more adept you are in managing sales tax, the less likely you are to make costly missteps that could result in unfavorable audits or upset customers and supply chain partners. The list below shows the five basic steps involved in sales tax compliance, what you need to do for each step, and how a tax automation solution like Avalara can build efficiencies into each step to save you time and resources and reduce uncertainty.