Digital transformation and e-commerce companies
by February 23, 2024
Please note: This blog was originally published in 2020. It’s since been updated for accuracy and comprehensiveness.
Although not a new concept, digital transformation (DX) can mean different things depending on who you ask. Some may think of new processes (e.g. Domino’s AnyWare – order pizza from any device) or inventive business models (e.g. movie streaming through Netflix). Others may attribute transformation to domains (e.g. Google expanding into cloud computing) or a mix of multiple approaches.
Whatever digital transformation means to you, at a high level, it’s the application of technology to multiple business areas, which alters how companies operate and eventually deliver value to customers.
So what does this all mean for sales tax compliance?
Driving forces
Financial professionals today are facing two significant drivers of DX: the global pandemic and the Wayfair vs North Dakota supreme court case. First, as the pandemic redefines norms and challenges assumptions, it has accelerated DX for most businesses and changed consumer behavior almost overnight. For instance, nearly 150 million shoppers came online for the first time during the earlier stages of the pandemic. Many of those new online shoppers expect to continue shopping online via the convenience and safety of personal devices.
The pandemic, and the shifting consumer behavior that accompanied it, helped create a boom for global e-commerce marketplaces. For key markets such as China, Japan, and the U.S., market places started pulling more consumers away from standalone retail sites. In 2020 alone, sites such as Alibaba, Amazon, and eBay, accounted for 62% of global web sales.
The digital economy is expected to grow considerably as a result of the pandemic. According to IDC, businesses will increase spending on technologies and services that support digital transformation at all levels. Some examples include auditing/verification workflows, internal compliance, and tax software.
Companies that leaned on technology (e.g. via cloud computing) before the pandemic were able to adjust and respond to the market’s needs more nimbly. A recent Gartner report mentioned end-user spending on cloud services would grow over 23% by the end of the year which illustrates the urgency of transformative technology solutions. In addition, companies are beginning to double down on emerging technologies (e.g. containerization, virtualization, and edge computing) more rapidly to meet business and customer needs. Essentially, CIOs are more inclined to move mission-critical workloads to the cloud compared to the ‘pre-pandemic’ era.
Speaking of the cloud, several drivers prompted companies to adopt cloud much quicker than if the pandemic had not occurred (e.g. business operations, business resilience, and remote working). For instance, many companies began investing in cloud-enabled technologies such as artificial intelligence (AI), augmented reality (AR) across industries, or as in the case of retail, companies adopted hybrid options to retain customers such as Buy Online Pickup In Store (BOPIS).
Specifically, companies leaned on the scalability, flexibility, cost-savings, and reliability of the public cloud as online order volume increased. The pandemic accelerated cloud adoption where the cloud was seen as an enabler or a relatively inexpensive way for companies to remain agile amidst market uncertainty.
The pandemic also prompted companies to invest in cloud-enabled software to take advantage of automation. At its core, automation removes the need for people to perform mundane, repetitive tasks, which gives them more time to focus on higher-value projects. As a result, automation, as it pertains to sales tax, is a valuable addition to a company’s strategy because it reduces complexity, ensures filing deadlines aren’t missed, improves accuracy, impacts customer satisfaction, and saves time.
It’s also worth mentioning the potential impact of DX on company culture. As employees, partners, and other stakeholders adopt new technologies and ways of working it may be challenging for some to keep pace. That’s why constant communication across distributed workers is crucial to gain buy-in and clarity as companies deploy new resources, processes, and other changes throughout the organization. Cultures that encourage experimentation, agile collaboration, eliminate communication barriers and silos, embrace distributed decision making, rally behind a shared purpose, and are open to external influences, are cultures that tend to facilitate the company-wide adoption of DX.
The second driver of DX for sales tax compliance is the South Dakota v. Wayfair decision. This decision sent shockwaves through large and small companies alike because it lets individual states require sellers to collect and remit sales tax based on economic nexus. Before this decision, a company needed to only have a physical presence in a state to be responsible for sales tax collection and remittance. The Wayfair ruling changed things, so now sellers do not need a physical presence in a state to collect sales tax on behalf of the state.
In most states that have enacted economic nexus laws, as long as the company meets the state’s threshold for revenue generated or volume of transactions, they must adhere to the state’s sales tax laws. Today, there are 14,000+ state and local taxing jurisdictions in the United States, so keeping track of rate changes, rules, thresholds, and filing frequencies comes with a litany of challenges without a dedicated software solution to navigate the complexity. Another way to look at this is that forty-three states have adopted economic nexus regulation out of forty five states (incl. the District of Columbia) that have enacted state sales tax laws. The inconsistencies across most states further highlights the challenge of manually managing sales tax compliance.
With roughly a $400 billion tax gap between taxes owed and collected in 2019, states are becoming savvier in how they track and collect lost sales tax revenue. A couple of improvements are intrastate data sharing and state programs such as CO SUTS, which acts as a “one-stop portal,” allowing businesses to collect and remit state and local retail sales tax in Colorado. As you can see, states are leveraging technology and new processes to ease the collection and remittance of sales taxes – companies with dated methods of managing sales tax compliance need to catch up or risk falling out of compliance.
The need for digital transformation has also opened the door for tighter collaboration between finance and technical teams to meet new challenges brought on by the pandemic and Wayfair. The role of the CFO is increasingly becoming more involved in strategic DX discussions. Today’s financial professionals are leveraging technology to transform finance at their companies which ultimately helps reduce waste and inefficiencies. This is especially the case for finance leaders who need a more hands-off yet accurate way to manage sales tax through automation.
What does this mean for sales tax compliance?
As more consumers shop online and more states enforce economic nexus legislation, the more exposure companies have to sales tax laws in each state. Companies that struggle the most still leverage manual/antiquated processes that do not measure up to the new requirements for sales tax compliance. To mitigate the risk of non-compliance, it’s worth considering a software solution. Cloud-based platforms are ideal because they scale as you scale, with automation throughout the entire sales tax life cycle no matter where you sell online.
Automating compliance helps you reduce human error, stay up to date with the latest sales tax laws and rates across jurisdictions, and submit filings and remittance on time, so finance teams can focus on higher-value projects.
Although automation will get most companies close to the finish line for compliance, many rely heavily on their SaaS vendors for guidance in navigating the sales tax compliance process. Some of the ways vendors are helping are: increasing educational content (e.g. blog posts), leveraging partner relationships (e.g. implementation partners), and in many cases relying on support for guidance along the way. As companies realize the need for compliance support, there are a few considerations to keep in mind as they work to shorten the list of vendors: innovation (e.g. ML to ease the process of compliance), training and education (especially as rules and regulations shift for tax professionals), cloud adoption (to see and implement changes in real-time).
As states increase their sophistication and adopt new ways of collecting sales tax revenue, so should you have a ‘partner in sales tax’ to help you meet your compliance obligations. Through sales tax automation, which includes calculations, nexus tracking, reporting, and filing, you won’t need to carry the weight of sales tax compliance – that’s why we’re here.
Ready to automate sales tax? Sign up for a free trial of TaxJar today
