Managing the tax and data challenges of omnichannel retailing

Most multinational retailers have embraced an “omnichannel” sales approach that engages customers through various digital and physical pathways, including brick-and-mortar stores, kiosks, websites, social media, and mobile apps. The omnichannel approach's main advantages are operational efficiencies, reduced costs, increased brand consistency and accountability, and increased customer sales and retention. However, providing a seamless, consistent experience through multiple channels isn’t easy, particularly regarding the technology required to manage the experience — for example, the sales and checkout experience. Indeed, from a tax standpoint, omnichannel retail environments are complex and present several formidable challenges for IT and tax departments, partly because of the multi-faceted nature of an omnichannel retail strategy and partly because of its technical demands.

Rethinking the digital future

One of those demands is determining, calculating, and recording the correct taxes for every transaction, regardless of which sales channel they arise from. Timely, accurate, and consistent tax calculations are important because they help create the hassle-free shopping experience customers expect, which is vital to growing and retaining a retailer’s customer base. If an incorrect amount of tax taints the customer experience in any way, customers may go elsewhere, the brand’s reputation may be threatened, and the company can lose revenue. If the problem isn’t resolved quickly or happens to spread, it can lead to audits, penalties, and even legal issues.

The challenges of accurate tax determination are also exacerbated by the very circumstances that led to such a rapid expansion of omnichannel retailing in the first place. In the retail space, the pandemic accelerated the adoption of various e-commerce and mobile platforms so rapidly that some companies had to retrofit existing systems or implement temporary stopgap solutions to support these sales without assessing the full impact of the expanded sales footprint on other areas of the business, like data management, tax operations, etc.

With the omnichannel approach being the dominant model for most retailers, companies have to rethink how their brand channels interact with one another and retool their business systems to operate more efficiently in the omnichannel retail environment.

Key challenges for indirect tax retailers

Retailer tax and IT teams face several critical challenges when managing indirect taxes:

• Retail content 
• Omnichannel support 
• Reliable performance 
• Variety of products or services sold 
• Pace of change in products or services sold 
• Variety of types of tax calculation needs — ship-to, sell-to, returns, digital, brick and mortar, etc. 
• Number of disparate systems needing tax calculation that are managed separately and lack access to the level of consistent data needed 
• Volume of transactions — retailers experience high sales volumes and systems must be able to meet the needs

Data management is another challenge facing omnichannel retailers, especially businesses attempting to manage multiple sales channels with legacy systems cobbled together over the years but never truly integrated. Tax is one area where reliable data management is especially crucial because so many variables are involved.

For example, if a customer buys a product online, they expect to be able to return it however they want — by mail or in-store. From a tax perspective, however, providing this kind of flexibility requires a system that can process accurate tax calculations across different channels and locations, which requires organized data flows and integration between various business systems.

Consider a company that sells hundreds or thousands of products. The company must keep track of tax product classifications, exemptions, and special rules for different kinds of products and services sold, not to mention rules for new products and services added to their supply chains. Tax rates can also change depending on the product’s nature, its physical jurisdiction, and the channel through which it is sold. Seasonal sales surges, discount programs, and other promotional events can further complicate the tax picture, as can changes in international regulations and tax law.

Massive transaction volumes

Another hurdle for tax and IT teams trying to manage an omnichannel retail enterprise is the sheer volume of transactions that must be processed every minute of every day. Depending on the organization's size, tax systems may be processing millions of transactions every week and, for some, every day. During the holiday season, transaction volumes can spike dramatically, stressing outdated processes and systems and the teams trying to maintain them.

Bear in mind, too, that the pricing of products may change depending on the jurisdiction and that “surge” pricing on specific products or services can change the price from minute to minute, altering the tax calculation and, for the customer, the final price they pay. All these requirements generate an enormous amount of data, and retailers often have multiple systems for different functions, making data management much more difficult. There are inventory management tools, point-of-sale (POS) systems, e-commerce platforms, interfaces, and any number of business and financial systems, all of which must work in harmony with each other but often don’t because each system is managed differently.

No room for errors

In the past, businesses had leeway for errors, allowing them to report, file returns, and pay tax after the transaction occurred. If they identified any mistakes, they could rectify them before filing a return. However, with the implementation of e-invoicing and real-time reporting in many countries, this flexibility is no longer available in today's rapidly evolving environment. Consequently, retailers need tax systems that offer reliable 24/7 performance across all sales channels.

Furthermore, omnichannel systems need the flexibility to handle ever-changing tax rules and regulations, as well as the ability to scale to support dramatic fluctuations in sales transaction volumes. That scalability should also extend to the enterprise itself; as the enterprise grows and adds new jurisdictions, the tax system’s capabilities should also expand. Certainly, an effective tax management system for a growing omnichannel enterprise should never choke just because the sales volume has suddenly spiked. Rather, the system should be engineered to handle all sales situations, regardless of the speed, volume, and complexity of the calculations — and it should be able to process these calculations reliably, accurately, and automatically — every time, without human intervention.

The move toward system centralization

Determining and calculating accurate tax and managing all the systems across the sales channels is difficult. Furthermore, the need to integrate multiple systems and manage large volumes of data from different sources is another reason why many omnichannel retailers are replacing their legacy systems with centralized, cloud-based systems. Such systems are designed to support multiple sales channels and scale as the business grows and its needs evolve.

Unfortunately, most enterprise resource planning systems (ERPs) are not optimized for taxes and usually require a separate tax engine or “bolt-on” solution to manage the trickier aspects of tax calculation and compliance. Furthermore, the extraordinary volume of tax data generated by omnichannel sales can be a drag on other parts of the system.

Centralized systems, by contrast, help ensure consistent and accurate tax calculations regardless of data volume because all business functions and their systems are integrated through a single, infinitely scalable source of truth.

In cases where a centralized, cloud-based system does not serve the organization's various needs, there are other options. Even with non-centralized tax calculation, it is possible to add the proper capabilities to each retail channel and integrate them through an ERP.

The edge-to-cloud option

Another option to support omnichannel needs is to create a hybrid system — known as “edge” or “edge-to-cloud” computing — which combines the benefits of on-premise and cloud-based computing.

In an edge system, the tax calculation engine is situated within the business’s existing infrastructure, which puts it in close physical proximity to the systems managing business transactions. Physically integrating the tax engine into the business’s existing infrastructure gives IT more control and ensures consistent, high-speed, latency-free tax calculations. Meanwhile, the tax system also leverages the advantages of a cloud-based solution, which includes real-time tax calculations, automatic updates for global tax rates, continuous monitoring and updating of international regulations for tax compliance, relatively low maintenance costs, and superior scalability.

For these and other practical reasons, edge computing has become a popular method for introducing a new tax engine to systems with an established technological infrastructure.

In either setup, the advantages of centralization are complemented by automation of the day-to-day tax function, which provides the speed and accuracy necessary for success in omnichannel retailing.

Centralization + automation = efficiency

Regardless of which option a company pursues, the closer it gets to a centralized, automated tax platform, the better. That’s because a unified tax platform that is fully integrated with a retailer’s other business systems goes a long way toward eliminating unnecessary disruptions and inconsistencies in the system — a frequent source of errors — and ensures that data from all sales channels is being sent and processed as efficiently as possible.

For these and many other reasons, the key to managing an omnichannel retailer’s many technical and tax challenges is a centralized business platform in which most, if not all, day-to-day tax functions are automated. Without the help of centralization and at least some automation, retailers are left with the difficult task of maintaining tax rates and rules in each separate sales channel, such as brick and mortar and e-commerce, funneling that data to relevant business systems — for example, tax, finance, sales management, and inventory management — and ensuring the data itself is clean and reliable.

Benefits of a centralized, edge-to-cloud, and automated tax platform

• Centralization 
  Centralization simplifies tax management across all systems through a single solution, providing access to data from one source and minimizing maintenance efforts and the risk of errors. 
• Edge-to-cloud 
  Edge-to-cloud computing ensures that systems are continuously updated with the latest regulations, leading to decreased IT maintenance and costs and the capability to manage large transaction volumes. If necessary, cloud-based systems also make connecting ERPs and third-party tax engines easy by using pre-built bridges for specific ERPs. 
• Automation 
  In a tax context, automation makes it possible to accurately calculate and process all necessary tax information, regardless of transaction volume, without the need for human intervention. Thus, automation relieves pressure on IT and tax teams and gives tax team members more time to devote to higher-value-added activities such as tax planning and forecasting, positioning for success.

Positioning for success

As global commerce becomes increasingly digital, the difference between success and failure in omnichannel retailing often comes down to how effectively and efficiently a company manages its data. Tax data is critical because, unlike other data types, inaccurate tax calculations can negatively impact the customer experience, damage the brand, and result in audit penalties and interest.

Consequently, a company that invests in its technological infrastructure now has a much better chance of ensuring a frictionless shopping experience for its customers well into the future, and the same investment helps position the company for success as the enterprise grows and evolves.

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 and 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 how you do business.

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