Managing regulatory change and risk in omnichannel retail

Omnichannel retailers engage with customers all over the world through a variety of different touchpoints — for example, brick-and-mortar stores, websites, mobile apps, kiosks, social media, etc.

As the global marketplace goes increasingly digital, emerging technologies such as the metaverse and generative artificial intelligence will create new opportunities for retailers. Multinational corporations (MNCs) can expect to add even more avenues of commerce to their omnichannel empires. To do this, they will need to invest in the technological infrastructure necessary to support an omnichannel retail strategy. They will also need to develop better ways to keep up with changing international regulations and find more effective ways to mitigate risk, especially in cybersecurity.

Tax compliance is another area that cannot be overlooked. Tax rules and regulations change frequently in many countries. Even if they didn’t, multinational retailers would still have their hands full staying current with all the small, yet very important, changes to products and services they offer, associated codes, and classifications that often vex MNC Tax and IT departments. A retailer that sells hundreds of products or services in dozens of countries, or even a domestic retailer selling in multiple states, may encounter a different tax scenario for each product or service. Each scenario depends on its origins, its path to market, the jurisdiction where the product is sold or service performed, and the channel through which it is bought.

Moreover, staying up to date on changes to regulations, codes, and classifications is essential to the task of accurately calculating, collecting, and remitting the correct tax for every transaction a retailer processes — regardless of the channel involved or the geographical location of the customer.

Older technologies are aging out

Technology, combined with changing consumer behaviors, is driving this transformation of the retail sector by giving customers more options to engage with brands than ever before, and by giving companies the means to deliver the options customers want. Peek under the hood of the average MNC's tax engine, however, and you will often find aging technologies that are running as hard as they can, as fast as they can, just to keep up.

Large retailers typically have multiple business systems running simultaneously, such as ERPs, point-of-sale (POS), e-commerce platforms, etc., but they often manage each retail channel independently. In an omnichannel retail environment, data from one channel often needs to be shared with other channels. Most retail systems implemented during the brick-and-mortar era were not designed for this kind of data sharing, so companies have forged ahead with a series of patches and workarounds, including manual processes. Temporary stop-gap measures that, in the digital/mobile era, have reached the practical limit of their capabilities.

There is an urgent call for older technologies to be replaced. The fact is, manually managing omnichannel sales and taxes almost guarantees that a company will miss some rate or rule. Possibly, encounter a systemic limitation that exposes the enterprise to various levels of risk.

These risks can be financial, legal, and reputational. Outdated systems might lead to missed tax payments or overpayments, both can result in penalties. Additionally, failing to comply with tax regulations can lead to legal trouble. Finally, if a company is discovered to be mishandling sales tax, it can damage its reputation and customer trust.

Retailers that don’t want to be left behind need a dedicated tax solution that manages all the tax implications of an omnichannel retail strategy and works 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. 

Beyond automation

Automating most or all of the processes involved in tax determination is an obvious first step in simplifying the burden tax professionals experience as a result of omnichannel. Automation plays a crucial role in simplifying compliance procedures, and guaranteeing precise tax calculations at the point of sale — physical (B&M) or virtual (e-commerce) — eliminating lengthy delays. By automating product tax classifications, tax calculations, reporting, and remittance, retailers can reduce errors, improve efficiency, and simplify the process of responding to tax audits and inquiries.

Automation alone can’t solve every problem. Tax and IT departments also need a way to consolidate and centralize the management of tax applications across multiple channels. Centralization makes it easier to manage tax policy across the enterprise and simplifies the process of collecting data for audits and reporting. A properly supported and designed system should also adapt automatically to changing tax regulations and be capable of scaling up when demand surges during holidays and special events. Finally, such a system should also seamlessly integrate with various retail systems, such as ERP, POS, and e-commerce platforms, and reduce the overall stress on Tax and IT departments .

The complexity of international tax calculations and the speed at which they must be made is another reason why a centralized solution makes the most sense for omnichannel retailers. A single solution with the proper content support should automatically keep track and update systems with changing tax regulations, product classifications, and any special rules that need to be considered. Programmed properly, an automated solution should also be capable of managing tax rates for different products and services regardless of where the product is sold or through which channel. If any audit challenges arise, the solution should maintain clear and accurate records for each product or service sold, providing a clean data trail for auditors.

Finally, a reliable, centralized automated tax system supporting business platforms is the best way to help ensure a frictionless customer experience when they are researching and buying a retailer’s products or services.

Planning ahead

Though the need to provide a frictionless customer experience is an important factor in the push for automated tax calculations, yet another driving force for MNCs is the inescapable fact that governments around the world are digitalizing their tax regimes and forcing companies to comply with increasing real-time tax calculations and reporting mandates.

For example, more than 80 countries now have, or are considering, mandates for e-invoicing and/or continuous transaction controls (CTC), including the European Union (EU), much of Latin America, Saudi Arabia, and many other countries. This means that companies doing business in those countries are, or soon will be, required to submit electronic invoices for transactions directly to government tax authorities — and, if CTC is part of the e-invoice mandate, data from electronic invoices will need to be reported in real-time, or near real-time.

Mandates like these require companies to electronically submit each invoice to the relevant taxing authority as the invoices are being created, and sometimes before the invoice is sent to a customer. To conduct business and make sales, every system used for each channel must be able to submit invoices to tax authorities in the required format and through an approved network.

E-commerce and automation

Digital reporting mandates, such as e-invoicing and real-time reporting, require some level of automation because it is nearly impossible to accurately calculate and transfer real-time business transaction data using manual methods. As reporting mandates are implemented in different countries, the rules surrounding them tend to change as governments work out the kinks and fine-tune their tax and reporting systems. Keeping up with these changes is crucial for compliance, but it can also be extremely difficult, especially for companies that operate in dozens of different countries.

In the not-too-distant future, all tax and compliance workflows will likely be digitalized, so it is in every large retailer’s best interest to invest in the technological infrastructure necessary to accommodate e-invoicing, e-reporting, e-compliance, e-auditing, and any other tax and compliance initiatives that arise out of the inevitable digitalization of global commerce.

To meet this challenge, companies will need to ask themselves whether their current technologies are up to the task, and if not, what needs to change to position the organization for success in the future?

Keep in mind that governments aren’t the only beneficiaries of digital tax policies. Retailers also benefit from the digital transformation of their tax and compliance functions.

In addition to accurate tax calculations and reporting, real-time tax data offers retailers a treasure trove of information on what products and services are: in demand, where, at what price, and through which platforms. This level of transparency gives retailers the flexibility to analyze and respond to facts on the ground as they are happening, and it also gives them greater visibility into their supply chain and provides valuable insights that help inform decision-making, enabling a more proactive approach to everything from inventory management to tax planning. These capabilities also help tax teams transition from being a mere compliance and reporting hub to being valuable advisors for the enterprise and its leaders. Tax departments are evolving from traditional cost centers to profit centers by leveraging technology and various strategies to enhance their efficiency and value contribution.

Managing audit and security risks

While it is important for retailers to create a seamless shopping experience for customers and stay current with international tax rules and regulations, it is equally important for them to manage taxes and compliance in a way that does not invite audits or risk expensive penalties. Companies that do not invest sufficiently in tax technology run a greater risk of being audited, penalized, or both. According to the Thomson Reuters 2023 State of the Corporate Tax Department report, 47% of the businesses surveyed said they feel their tax departments are under-resourced, in terms of technology and skilled talent, and that this lack of resources has led directly to a higher risk of audits and penalties. Indeed, 72% of companies with under-resourced tax departments incurred audits in the past year, compared to 61% for all companies, and 47% of businesses with under-resourced tax departments incurred tax penalties, compared to 42% for all businesses. Furthermore, the value of the penalties incurred by under-resourced tax departments was twice the median penalty incurred by all other tax departments, on average. Tax departments that are adequately resourced tend to have more sophisticated enterprise technologies at their disposal, insulating them from the risk of audits and making it much easier to gather the necessary data and generate reports for regulators. These technologies include, but are not limited to, centralized, cloud-based systems where enterprise and tax data are integrated, tax workflows are mostly automated, and some level of machine learning and/or artificial intelligence provides data for pre-audit analysis and reporting. With cross-departmental data-sharing and analysis, such systems make it possible to proactively manage risk and gather strategic intelligence through scenario modeling and data analytics.

Superior cybersecurity

Improved cybersecurity is another ancillary benefit of more sophisticated tax management technologies. Retailers need to be diligent against hackers attempting to infiltrate their POS devices or infecting their systems with ransomware or malware — not because their systems are inherently more vulnerable, but because any disruption of the system could represent an existential threat to the business. Such events can drive away customers, impact sales transactions, and result in damage to the brand’s reputation, especially if a breach gives thieves access to customers’ data.

Centralized, cloud-based tax management systems are more secure than in-house legacy systems for several reasons:

1. Cloud-based systems are typically hosted through third-party providers that have more resources to invest in deeper security measures, like a full-time staff that monitors the business’s infrastructure 24/7 and ensures that the latest software patches and security updates are installed.

2. Even if hackers were somehow able to access customer data on a cloud provider’s servers, they wouldn’t be able to read it because the data itself is encrypted. For data that is particularly sensitive, additional measures such as multi-factor authentication and custom encryption keys add another layer of security.

Don’t get left behind

To sum up, today’s retailers have little choice but to develop and/or extend their brands through an omnichannel sales approach. For tax and IT teams, however, calculating the taxes for transactions in an omnichannel retail environment presents several serious challenges, not the least of which is keeping up with the latest tax rules and ever-changing regulations. Additionally, as countries around the world digitalize their tax regimes, these challenges are likely to be compounded by government mandates for real-time tax remittance and reporting. Companies that find themselves struggling to keep pace with the ever-changing nature of omnichannel retailing need to evaluate the effectiveness and efficiency of their current systems. Then, determine whether the solutions they have now are going to be sufficient to compete in the future. Retailers that fail to invest in their technological capabilities may not go out of business immediately, but they do risk damaging the customer-brand relationship with sluggish tax systems, frequent errors, and potential compliance problems. These issues can result in loss of customers and business, bad press, more frequent audits, greater regulatory scrutiny, strained government relations, and possible penalties. For companies hobbled by aging technology, the most sensible solution is to consolidate the tax function into a centralized tax management platform that uses a single tax engine for all retail channels and automates the tax calculation process to deliver the speed and accuracy required of an omnichannel sales environment. If supported by a third party, a system should also have the flexibility to scale as the enterprise grows, and to automatically incorporate changing tax rules and regulations into its calculations, without the need for human intervention or supervision.

About ONESOURCE

ONESOURCE® Determination provides a comprehensive global solution for the efficient and accurate calculation of 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 global tax jurisdictions in over 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 because of legislative changes or changes to the way you do business. Click here for further information: tax.thomsonreuters.com/en/industry/retail

About Thomson Reuters

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