How tax automation can transform the omnichannel retail experience

In recent years, almost all retailers have adopted an omnichannel sales model in order to remain competitive and relevant in a global marketplace that is becoming increasingly digital. There's nothing new there.

However, the retail sector is undergoing a stressful transformation to accommodate consumer preferences for e-commerce, a veritable explosion of economic e-intermediaries — for example, Stripe, Stax, and Square — and the total digitalization of everything from order tracking to tax remittance. On top of it all, consumers have come to expect everything in their digital universe to work — and if it doesn’t, they will not hesitate to shop elsewhere.

An omnichannel approach differs from more traditional sales models in that it engages customers through a variety of digital and physical channels, including brick-and-mortar stores, kiosks, websites, social media, and mobile apps. According to McKinsey & Co., about 60-70% of consumers research and shop both online and in stores now, and the younger consumers are, the more likely they are to engage with a brand through multiple channels.

The acceleration of online shopping during the pandemic solidified the trend toward omnichannel retailing. Customers now expect a consistent and seamless brand experience across all channels, regardless of what they are buying or how. Consequently, companies have to rethink how their brand channels interact with one another and retool their business systems to accommodate the extraordinary complexity of a multi-channel retail environment.

Tax challenges and risks

For indirect tax and IT teams, in particular, the complexity of an omnichannel retail strategy presents several formidable challenges. It’s not easy to determine, calculate, and deliver accurate and reliable tax results on numerous products for a company that may be processing hundreds or thousands of transactions per second — on multiple platforms simultaneously — from locations around the world. The number, complexity, and speed — where milliseconds matter — of the necessary tax calculations place a heavy burden on e-commerce platforms, point-of-sale (POS), and enterprise resource planning (ERP) systems, not to mention the overall technological infrastructure needed to sustain a global, 24/7 retail network.

Keeping up with the latest tax rates and regulations places additional pressure on indirect tax teams; if they make mistakes, those can quickly snowball into more severe problems. When a customer can buy an item anywhere and return it elsewhere, calculating the correct tax based on location is much more difficult. Moreover, countries, states, counties, and cities often have different tax rules for different products, which frequently change.

The United States alone has over 28,000 sales and use tax jurisdictions, resulting in hundreds of thousands of different tax treatments for products sold by retailers. Similarly, each European country has its own rates for separate products. Companies that operate online marketplaces may also be responsible for collecting and remitting taxes for the merchants featured on their marketplace, adding even more layers of complexity.

Calculating and remitting the correct tax may not seem like an existential issue for omnichannel retailers, but it is. Maintaining a seamless and trouble-free customer experience is vital to keeping and growing a retailer’s customer base. If incorrect taxes taint the customer experience in any way, customers may return what they bought and go elsewhere, which could threaten the brand’s reputation and the company can lose revenue. If the problem isn’t resolved quickly or happens to spread, it can lead to more frequent audits, greater regulatory scrutiny, penalties, and potential legal issues.

Insufficient tax resourcing

Given the consequences of inaccurate taxes, one might expect that most multinational corporations (MNCs) have done everything they can to ensure that their systems are up to date — but many have not. According to the Thomson Reuters 2023 State of the Corporate Tax Department report, almost half (47%) of the businesses surveyed said they feel their tax departments are under-resourced — both in terms of technology and skilled talent — and that this lack of resources has led directly to a higher risk of audits and penalties.

One of the biggest reasons why many omnichannel retailers have not invested sufficiently in their tax systems and departments is that the need for more sophisticated tax-management technologies has grown faster than expected. Indeed, the pandemic accelerated the adoption of various e-commerce and mobile platforms so rapidly that companies often had to resort to retrofitting their existing systems or implementing temporary stopgap solutions to meet the sudden surge in demand from the digital side of the business. Or, companies may have attempted to manage each sales channel independently, requiring tax teams to spend more time navigating disparate solutions in each channel.

Dangers of falling behind

Unfortunately, omnichannel retailers still managing taxes through a patchwork system of legacy technologies are in a bind. Interim, pandemic-related workarounds are not sustainable; the longer they are operational, the likelier the enterprise will encounter some sort of adverse tax event. After all, trying to manage omnichannel taxes manually all but guarantees that a company will miss some rate or rule or encounter a systemic limitation that exposes them to more risk. In the long run, companies that forge ahead without a comprehensive tax management system capable of handling the complexities of an omnichannel sales strategy risk falling behind in a technological future where speed is paramount and the competition is fierce.

Immediate concerns aside, an additional consideration is that with the rise in technologies like generative artificial intelligence (GenAI), the metaverse, digital currency, and ever-more-influential social media apps, retailers will naturally want to expand their channels and enhance their customers’ experiences in whatever way they can. To accommodate these increasingly ambitious retail initiatives, companies will need a tax management system to help support and extend their technological capabilities well into the future.

Better tax management through centralized tax intelligent automation

Overcoming these and other challenges related to the digitalization of global commerce requires a system-wide reevaluation of corporate tax strategies and the technological infrastructure that supports them. This includes investing in a centralized, flexible, and robust tax management system — one that can process accurate tax calculations in an omnichannel tax environment regardless of the speed, volume, number of products, and complexity of the transactions involved.

Retailers who don’t want to be left behind also need a dedicated tax solution that will work well with all their other business systems. An effective system should also be scalable enough to expand as the business grows and flexible enough to enable new retail innovations.

What might that system look like? 

The most sensible solution to a disjointed, piecemeal retail tax system is to consolidate the tax function onto a centralized tax management platform with built-in retail tax content that uses a single tax policy for all retail channels with options for where tax calculation occurs (cloud or edge). Using an edge computing tax engine that seamlessly syncs with the cloud is critical for retailers who do high volumes of tax calculations and can't use a cloud-only tax engine because the latency is too high.

Centralization makes it easier to manage tax policy across the enterprise and streamlines the process of collecting data for audits and reporting. Centralizing and simplifying data flows also allows the tax calculation process to be fully automated, which is the only way to deliver the speed and accuracy required of an omnichannel sales environment.

Importance of tax content

Tax content that drives the tax automation is significant to retailers because of the tax rule complexity by product sold and other unique retailer taxes like bag fees, can recycling fees, Public Improvement Fund taxes, and more.

Global retail tax content examples: 

• Sales tax holidays that only apply to particular products for a specific or short time frame
• Social programs like SNAP benefits
• New retail delivery fees — for example, Colorado
• Special fees or taxes on large sugary drinks, plastic bags, tire recycling, battery recycling, monitor or TV screen sizes recycling, etc.
• Deli or in-store restaurants that prepare food are subject to different tax regulations compared to grocery food, like this court case example
• Public Improvement Fund taxes that are very specific to exact locations — 1 or 2 square miles — and have different rates for the same location based on various factors
• Additional taxes on alcohol and gasoline
• Plastic packaging tax
• Carbon border adjustment mechanism (CBAM) 
• Determination of when the e-commerce platform is liable to pay value-added tax (VAT)
• One-stop shop returns 

Tax content, which is critical for automation

Indeed, automation is the key to streamlining the compliance process and ensuring accurate tax determination at the point of sale — not days or weeks later — which is the case with post-audit reporting processes. By automating tax calculations, reporting, and remittance, retailers can reduce manual errors and improve the system’s overall efficiency.

More importantly, automating tax calculations can ensure that omnichannel retailers deliver a smooth, frictionless customer experience. In the retail world, that means a fast, efficient checkout process in which all taxes are correctly calculated, regardless of the retail channel the customer is using, their geographical location, or any special coupons or promotions they wish to redeem. A well-supported, fully automated tax-management system should also be able to scale up when transaction volumes surge during the holidays and special events.

Tax errors are serious business

Omnichannel retailers who are on the fence about investing in a more capable tax-management system should consider the consequences of a seemingly simple tax error. Auditors know how difficult tax can be for retailers and target these companies. According to the previously mentioned tax department report, 72% of under-resourced tax departments faced audits and 47% of businesses with under-resourced tax departments incurred tax penalties.

After all, retailers invest enormous amounts of time and money into their store layouts, online presence, product offerings, marketing efforts, and advertising — all to attract customers and build brand loyalty. But those efforts can quickly be undone if, at checkout, a tax glitch slows or derails the process and the customer decides to shop somewhere else. Or, if a customer buys an item online and wants to return it to a brick-and-mortar location, an opportunity to please that customer could easily go awry if “the system” has trouble calculating the tax on the returned item.

Loyalty is built one transaction at a time. Likewise, it only takes one bad experience to lose a customer forever. These days, a single disgruntled customer can also go online and persuade others to abandon a brand, multiplying the impact of a seemingly minor tax issue. If mistakes are chronic and ongoing, dissatisfied customers may be the least of a retailer’s problems. Regular tax errors invite more frequent audits, more intense regulatory scrutiny, and expensive and brand-damaging litigation in the most extreme cases.

Flexible, scalable, and powerful

To avoid such problems, omnichannel retailers need a tax management system that minimizes mistakes and maximizes customer satisfaction. A centralized, automated tax-management solution offers the best combination of flexibility, scalability, and power that omnichannel retailers need to stay competitive in an age driven by the buying habits of a populace with more choices at their fingertips than ever.

The transition from tactical to strategic

Tax departments can also benefit from the high-quality, real-time tax data that such a system yields. Indeed, greater data transparency allows retailers to analyze demand patterns, monitor supply chains more effectively, and generate strategic intelligence that can lead to improved decision making from the C-suite down to the supply chain. More capable tax technologies also make it easier for multinational companies to expand into other countries, where compatibility with the host country’s tax regime is essential.

Future-proofing tax management

Finally, as the technological infrastructure of global commerce goes increasingly digital, companies that invest strategically in their business infrastructure will be better positioned to leverage the possibilities of future technological innovations. GenAI, digital currency, and the metaverse are only the beginning. Many areas of technology are accelerating exponentially, which means that the next five to 10 years will be an exciting time for retailers in search of promising new sales opportunities and potential new retail channels — provided they’ve established the technological infrastructure necessary to take full advantage of those opportunities. 

Tax is often overlooked as a component of a company's success, so freeing up the tax department to go beyond compliance and embrace a more strategic role is a crucial objective. A carefully and intelligently managed, comprehensive, automated tax-management system can help omnichannel retailers provide the kind of rewarding, trouble-free shopping experience that customers expect and that builds trust in — and loyalty to — the brand. 

ONESOURCE Determination provides a comprehensive global solution for efficiently and accurately calculating your indirect taxes

It is a secure, cloud-based solution that integrates with leading IT systems as well as homegrown systems. Our global tax research team monitors more than 19,000 international tax jurisdictions in more than 205 countries and territories covering global indirect taxes — all of which get automatically integrated with your business systems. As a result, our solution enables you to effortlessly navigate the ever-changing tax landscape without the burden of having to configure your IT landscape due to legislative changes or modifications to the way you do business.