E-commerce businesses today can easily tap into markets across all 50 states. But with this expansive reach comes a multifaceted challenge: managing the complex process of filing and paying state sales taxes. And with a rising accountant shortage, online retailers face a daunting task.
For years, companies relied on the expertise of accountants to navigate the labyrinthine maze of state tax codes. Each state, with its unique rules, deadlines and nuances, requires specialized knowledge, particularly as legislation at the state, county, city and district levels becomes more complicated. This year we’ve seen a 43% increase in the number of changes in sales tax rates across the U.S. But as more accountants retire or move to other fields, their valuable insights into sales tax management are lost.
Recent data highlights this decline. The Bureau of Labor Statistics revealed a staggering 15.9% drop in the number of accountants from 2019 to 2022. Notably, many of those exiting the profession had over six years of experience. This isn’t just a numerical decline; it’s the evaporation of deep-seated knowledge.
For businesses, particularly online retailers, this can spell trouble. Ensuring compliance and accurately closing the books monthly without expert guidance becomes a challenging feat. Add to this the unique tax-handling procedures of different states, with some requiring direct log-ins to manage sales taxes, and the task becomes even harder.
Moreover, different online marketplaces, like Shopify and Stripe, have varied processes related to sales tax. Some might collect and pay sales tax on behalf of the retailer, while others might only provide their platform for sales, leaving tax considerations entirely in the hands of the retailer.
The immediate solution that might pop into some minds — offshoring — presents its own set of complications. While cost-effective, offshoring can often lead to security risks, especially when sensitive financial data is involved. The last thing a retailer wants is for its customers’ financial information or its own sales data to be compromised.
Given these challenges, sales tax automation tools are the way forward. To navigate this complex landscape, here are some essential steps online retailers should consider:
1. Recognize the importance of sales tax management: The first step in any problem-solving process is recognizing there’s an issue. Sales tax management is not a mere year-end task but a critical ongoing process that impacts the ability to close books accurately on a monthly basis. In fact, businesses with less than 500 employees spend an average of 209 hours per month on tax management activities, such as identifying state sales tax obligations and filing requirements.
2. Understand your marketplace’s approach: Considering the varied processes of marketplace platforms, it’s vital to understand how each one you sell through addresses sales tax. When utilizing a tax automation tool, ensure it accurately manages each marketplace and distinguishes between those that handle sales tax payments and those that don’t.
3. Stay updated with state sales tax rules: Just as you wouldn’t miss a shipment deadline, tax deadlines should be equally non-negotiable. Missing a deadline can lead to stiff penalties and even legal complications. For instance, retailers can be penalized 10% of the due sales tax for the first month and an additional 1% for subsequent months. But it’s not just about the deadlines; understanding specific rules, exemptions and rate changes is equally important.
4. Choose a comprehensive automation platform: If you decide to leverage sales tax automation, ensure the platform you choose offers strong customer service that can answer any questions and help address reconciliation issues. Additionally, a good platform should set aside collected sales taxes automatically and accurately, giving you peace of mind that your funds are properly allocated and ready for payment when the time comes and not mistakenly viewed or used as business capital.
The fact is modern accounting is evolving, with a focus on managing data flows rather than mere calculations. It underscores the need for systems that can efficiently process these streams, making automation tools invaluable.
To provide a clearer picture, consider the case of Böhme, a hybrid brick-and-mortar and ecommerce fashion brand. Annually, they invested 260 hours manually extracting data from Shopify for QuickBooks entries, often leading to discrepancies. Reconciliation was daunting, especially when sifting through their 300-page monthly statement and coordinating across 20 distinct bank and credit accounts. Missed payments only added to the chaos. Fortunately, by incorporating tax automation tools that seamlessly connect Shopify and PayPal with QuickBooks, Bӧhme transitioned to automated daily summaries, cutting down manual tasks and enhancing payment accuracy.
As online retail evolves and traditional accounting expertise wanes, businesses must adapt. Automation isn’t just an option; it’s quickly becoming a necessity.
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