4 Retail Trends and Their Sales Tax Implications

Shelby Toto
July 27, 2021

Over the past few years, I have had the unique privilege of working with many organizations to understand their business complexities as they expand and grow their company. Sales tax happens to go hand in hand with the journey of growth and expansion in virtually every market. 

When creating a brand it’s crucial to have a flagship product or service that creates a sense of purpose in the market. Once a customer connects with your company, growth naturally can occur. Depending on your organization’s growth strategies, new retail sales tax implications can start to creep in. Consider exploring recent growth trends while you gain an understanding of how sales tax doesn’t have to stand in your way. Here are some key retail trends that can potentially impact how your business needs to consider sales tax.

Different products, different tax rates

New products and services expand the customer loyalty with your brand. For retailers, adding new products is integral to customer-building, as they rely on new product launches or collection releases at an individual consumer-level to stay engaged with the brand. Other brands with considerably less volume of product expansion – technology, vehicles, SaaS – still have to keep up with customer demands for new enhancements or version releases to remain devoted once a customer. In most cases, we see product expansion boostings and spikes with marketing campaigns too. With faithful customers your brand can expand to the point where there is even internal buzz from your customers’ communities. 

An important retail sales tax implication with new products and services is they may not be charged the same way as before. For example, clothing and shoes. While shoes can be a natural vertical expansion to consider for a clothing retailer, sales tax in some counties and jurisdictions differ in the handling. In some cases, both items may be taxed at different rates or one item may be exempted. As you expand, it’s important to research the products or services you sell and in the areas you are doing business to make sure you are charging and collecting sales and use tax appropriately.

Ecommerce rise enhances in-store foot traffic

Contrary to initial thoughts (and fears) the physical retail store isn’t becoming obsolete. In fact retail stores are growing. Customers continue to crave the in-person feel and experience that was originally created by physical retail locations. What businesses have come to understand with ecommerce is that it can actually enhance and complement the customer experience. Concierge-type services can emerge when successfully deployed. for example, the ability to order another size/item for the customer, and then conveniently ship directly to the customer’s address, right from the store. In other considerations, “In-Store Pickup” gives customers a real-time capability to make a fix if an item doesn’t meet their initial expectations. In most scenarios, businesses will notice trends of increased wallet-spend with customers. When they are in the store, customers tend to buy more items and can see the rest of a store’s inventory.

Tax at a retail store location-level can be manageable for businesses to stay compliant. However, in some of these cases there may be additional taxing jurisdictions to consider. In some cases of “Send-Sales,” or shipping to your customer’s address of choice, the tax rate should be captured for tax calculation. It’s important to make sure your system/engine/or other can handle the different location parameters for appropriate tax application to the order. In cases where the customer is returning at your store location, your system should be flexible to understand which corrections to apply and what to balance for your internal compliance reporting. If these considerations aren’t addressed, there may be manual adjustments to anticipate closer to the filing process of remittance.  

Creating harmony within flexible return policies

Returns are fairly unavoidable when selling tangible goods, as it’s unlikely that a product pleases everyone. Having a flexible return policy, with a longer return-window period, can benefit your organization immensely as customers will gain a sense that they can rely on your brand. In mutual-interest between your customers and your company, returns can be a great avenue for gathering feedback for future products/offerings. Customers are likely to shop around when it comes to similar items in the market, meaning your return policy might set you apart from competitors in the market.

There are key factors to consider when creating your return policy, helping to minimize the downstream adjustments your internal resources will need to absorb. First, review the timeframe in which an item’s eligibility is acceptable for return. This can also increase the likelihood of a tax rate update event within your operations. Ensure you capture all pertinent date parameters for the appropriate tax for relocation. Your business will need to make adjustments for customer monetary spend. This often leads to additional downstream impacts to processes like filing and remittance compliance within the jurisdictions you operate.

Additionally, be sure to examine the system of record. Systems vary product to product, meaning you may be faced with limitations in capturing the detail necessary to automate either the retail experience and/or accounting processes for employees. 

The “pop-up” store makes brand loyalty more accessible 

As mentioned above, physical locations are a fantastic approach to customer demands, but they can also be a burden. A trend that started prior to the COVID-19 pandemic, but is returning with a vengeance, is the “pop-up” store. Pop-ups bring products to the public in an accessible, often interactive way. These stores can provide an element of traditional retail where you can sell physical products, perhaps even exclusive inventory, and a week or so later deconstruct to move on to the next business venture. The flexible timing gives additional benefits to your company like less overhead cost and increased community buzz online/word of mouth. It also allows for that in-person experience your customer might not always be able to obtain. 

However, pop-up stores can bear implications on both accounts receivable (AR) and accounts payable (AP) operations within your company. 

Sales/Accounts Receivable (AR): The first variables you want to scrutinize surround inventory, location and system(s). 

  • Inventory of the event should be accounted for ahead of time, especially considering any “exclusive” items or anything not typically sold to ensure the proper tax applications and rules are applied throughout the transactions of the event.
  • Location of the event most often will be the rate in which you will use for the transactions. Be sure to include all appropriate lower jurisdictions too (i.e. county, city, PIF/PUF if applicable).
  • System of record will be necessary for the event, also consider your consolidation requirements for filing as well so you can remit compliantly too. 

Purchases/ Accounts Payable (AP): On the purchasing side of your business there are other components to take into advisement: 

  • In regards to inventory sourcing, make sure all vendors you work with understand your nature and usage of purchases. For example, reseller arrangements should include your exemption delivered to the vendor for proper exemption of the inventory.
  • Specialty purchases, like eye-catching displays and marketing, can increase customer FOMO (fear of missing out) and turn-out to the event. Ensure your vendors are transparent with these purchases, including details like shipping/ freight and line-item break-downs of products/services for proper internal record keeping and furthering your audit defense. 

As your company grows, the associated retail sales tax implications will also continue to evolve. By keeping track of current business trends, you can maintain compliance without compromising customer satisfaction or future company growth.

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Shelby Toto

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