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P2 Consulting was started by a group of award winning consultants who recognised the opportunity to build a global consultancy firm that had clients’ needs at its heart. We understand the challenges clients face – the pace of globalisation, technology change and increasing regulation – and the pressure they are under to respond to these changes rapidly and efficiently.

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Wayfair or way unfair… Is your digital retail business tax ready?

By Adrian Mangan, Head of Retail and Paul Knott, Principal Consultant, P2 Consulting

 

21.08.20

In 2018, in a court case that pitted online retailer Wayfair – an American e-commerce company that sells furniture and home goods – against the state of South Dakota, the US Supreme Court ruled in favour of the latter. The result was that online businesses are now mandated to pay sales taxes where they make more than 200 transactions or $100,000 in in-state sales, even if they have no physical presence there. Within nanoseconds of the decision, other states – that had these “economic nexus laws” waiting in the wings – began to push them through. The upshot is that for online retailers, the US market is now – even more so – a digital taxation minefield.

However, two or so years down the line and research (produced by tax software firm Avalara) shows that online retailers are woefully unprepared, with barely 50% having complied with online sales tax laws. To be fair, retailers have had their hands full. They have had to deal with the increasing onslaught of digital change, shifting consumer preferences, supply chain headwinds (including Brexit) through to delivering complex Fix/Match/Win transformation programmes to remain relevant and competitive. And then along came Coronavirus. But, if you do business in the US, then comply with the Wayfair decision you must.

How do you comply with the Wayfair decision?

The necessity to comply with the Wayfair decision has left retailers with a bit of a headache. How do you achieve compliance with this ruling whilst effectively continuing to trade your business? Let’s say you’re a retailer outside of the US, who is selling online to customers in the states, then you’ll likely have to overcome the complexity of applying 45 different versions of local state taxes at checkout – 46 if the Senate approves the bill to make Washington DC the next state to do so.

What’s your best-case scenario? Probably that your IT infrastructure is readied and perfectly able to apply the correct taxes on the correct items at checkout (taking import duty out of the equation). Your worst-case scenario, is quite simply that it can’t. Obviously, non-compliance isn’t ideal with retailers running the gauntlet of non-payment of taxes and the risks associated with that – fines, reputational damage and a negative impact on revenue, which would be a bitter pill to swallow in these difficult times. Alternatives include not passing on local taxes to the customer at the point of sale and instead absorbing the cost as a hit to margin – again not ideal.

When assessing the suitability of your IT infrastructure to help your company comply with the Wayfair decision, remember that the front end of your website and checkout is only part of the equation. There’s also the requirements for accurate financial reconciliation, reporting and filing with relevant authorities, and those design implications to consider from an IT systems perspective.

Will other countries follow suit?

Outside the US, signs are emerging that following the judgement of this landmark case, other countries will adopt a similar position. The UK Chancellor, Rishi Sunak, signalled recently that an equivalent UK tax for online sales – on top of VAT – is under active consideration by the UK government. And you would imagine it’s hot on the priority list for a government looking at ways to bump up taxes in a bid to manage the UK’s gargantuan debt levels.

This is unlikely to close the tax-gap inequality between digital pure-plays compared to their bricks or ‘bricks and clicks’ competitors completely, though it certainly should narrow the gap if designed and implemented well. Coronavirus might have delayed retailers’ response to complying with the Wayfair ruling, but you can rest assured that the regulators, and the states that have already implemented these “economic nexus laws” will be on the case, given there’s billions of dollars to go after. Retailers need to comply now, or suffer the consequences.

At P2 helping our clients to respond to and solve these challenges is what makes us tick. If your business is encountering similar challenges and you’d like to speak to us about how we can help, please get in touch.

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