There’s no end in sight to the disruptive effects of the pandemic. The stay-at-home limitations, for example, have caused extreme changes in buying behavior—from the surges in demand for certain household goods to the rise of e-commerce.
Many large enterprises are succeeding in the pandemic because their processes were already scaled. But mid-sized businesses are particularly challenged to automate, grow and scale with limited resources. These enterprises are trying to pivot by shifting labor resources and adjusting budgets.
Prior to COVID-19, many organizations were planning or already executing digital initiatives to advance process automation. While the pandemic has constrained progress in some cases, a study by Deloitte which interviewed over 1,000 executives involved in transformation efforts showed that technology initiatives, including plans to move toward greater use of cybersecurity, cloud, AI and virtualization continued to be prioritized.
For organizations with established cloud-based systems, it is far easier to support remote workers than those with on-premise systems, which require employees to work on site. Cloud-based models allow mid-size companies to further automate, refocus staff and scale to meet business conditions.
Mid-size firms are also reworking business plans to meet greater fluctuations in supply and demand, volumes of transactions and shifts in sales channels. They are making changes to their supplier base, producing new products and adding new product categories. For example, when a textiles company or medical products company shifts to make personal protective equipment (PPE) such as masks, a new product category is sold through different channels. All of these changes have implications for sales and use tax.
Increasing complexity of indirect tax
From the tax perspective, determination of sales and use tax was already a complicated process prior to COVID-19, given there are more than 11,000 taxing jurisdictions in the U.S. and constantly changing rules and rates. Every year, an estimated several hundred new sales and use tax laws are added or changed. The 2018 Wayfair ruling added to the complexity of sales and use tax by requiring the collection of sales tax from customers in each state that goods are sold in, regardless of the seller’s physical presence in those states, if certain thresholds are met.
“Ultimately the pandemic has changed business models, adding to the complexity of tax. It's changed the volume of transactions that companies have and often the channels they are selling through,” says Mark Sieczkowski, senior product manager, Cloud, at Vertex, Inc., a leading tax technology and services provider that empowers global commerce.
Changing channels and tax laws
In the face of new products and channels that complicate sales tax processes, many states have recently enacted economic nexus laws, which place a sales tax collection obligation on remote vendors doing a certain amount of business in a state. These laws put the burden on the remote seller to collect and remit sales tax if they exceed certain thresholds.
If you are a remote seller and your delivery into a state meets or exceeds the threshold for a state, you are required to register to collect and remit sales tax for that state.1 Even if you are a remote seller who is no longer meeting a transaction threshold, the fact they registered still means they have to file a sales tax return. Even if it’s zero sales in a year, the remote seller still has to do the remittance,” Sieczkowski says.
More changes may be underway with moves from state legislation and tax authorities to place new sales and use tax requirements on marketplace facilitators, which sell goods through third parties. The changes shift the collection and remittance burden away from sellers, allowing states to streamline their enforcement and reduce collection costs. For more information, see the Vertex blog “Top 10 Marketplace Facilitator Issues: Part 2.”
Driving tax automation to the cloud
Automating sales and use tax calculation by adding a 3rd party tax engine brings scalability and operating efficiency. Choosing a cloud-based tax engine avoids infrastructure and maintenance costs while allowing the business to keep up with the latest tax changes with fewer staff and reduced costs. Cloud-based tax automation has further value, enabling mid-size companies to implement new work processes in response to tax requirements, refocus staff and scale to meet business conditions with even greater efficiencies than other deployment models such as on-premise.
“Especially with today’s remote workforce, automating in the cloud for organizations without the sales tax expertise on staff allows them to take advantage of resources who may not be in their regional area,” Sieczkowski says.
The companies that automate their sales and use tax functions with cloud-based solutions can have the potential to realize swift ROI, reduce costs and better align themselves strategically through the pandemic and beyond.