September 4, 2013, 3:58 PM

What e-retailers need to know about the online sales tax

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Some retailers say they've considered how they might change promotional offers to counteract any negative effect of new sales tax charges. But e-retailers interviewed by Internet Retailer say they could not offer extra discounts for long at a time when they're already competing on price and offers like free shipping. "It will have to be business as usual," Kirshner says.

E-retailers could benefit in some respects by the passage of the federal sales tax law, by allowing them to take advantage of services they might have shunned to avoid collecting sales tax. Eric Best, CEO of Mercent Corp., which helps online retailers sell through e-marketplaces like Amazon.com and eBay.com, says many of his clients have discussed how they might start using services, such as third-party warehousing and fulfillment services and affiliate networks that can create nexus for users.

"We expect our clients will become much more aggressive at adding Fulfillment by Amazon, Fulfillment by Sears, Google Express Shopping and affiliate networks," Best says. "Merchants that don't add these services could be left behind."

For larger web merchants like off-price mass merchant Overstock.com Inc., with more than $1 billion in sales, the removal of nexus as a basis for collecting sales tax will open the door to building more distribution facilities across the United States. "We're careful about where we create a physical presence today, because we don't want to create a tax nexus," executive chairman Jonathan Johnson says. "But if you have to collect tax everywhere, then it can make more sense to locate warehouses in other states so shipping times and costs are shorter and lower." He declines to comment more about potential plans for new distribution warehouses by Overstock, which for now operates distribution centers in Kentucky near Cincinnati, and its home base of Salt Lake City.

Amazon.com Inc., meanwhile, has been expanding its number of distribution centers across the United States, with more than 40 in place and plans to add another five by year-end, an Amazon spokeswoman says. It collects sales tax in eight states, and has agreements to begin collecting tax in other states including New Jersey, Texas and California.

Aside from the impact sales tax may have on customer activity, however, is the chore and overall cost of collecting sales tax. This includes mapping all of a retailer's products to the right tax classifications for each state, filing monthly tax returns to each state, and remitting to each state the collected tax revenue, also monthly. "I don't think tax collection will decrease sales," Kirshner says, "but the cost to comply with the law will crush us."

Kirshner estimates that the first year of complying with a nationwide sales tax collection law will cost his company $20,000 or more to modify product databases to associate each product with the proper tax codes, train employees how to use new tax software to comply with each state's tax code, and set up new tax collection software and integrate it with his online shopping cart, order management system and accounting software.

Scott Peterson, a former state tax official who is director of government affairs at Avalara Inc., a provider of sales tax software, says such costs tend to be highest for retailers with highly customized e-commerce technology built in-house.

Joshua Wood, Co-Founder of Ozbo.com, a web-only retailer selling products ranging from auto parts to groceries to pet supplies and No. 450 in the 2013 Top 500 Guide, says retailers with broad product ranges face a particularly large challenge. "The effect of a sales tax depends on what you're selling and your number of SKUs," he says. "We have many categories, including food, clothing and equine products, so we'll have to organize all our data into what's taxable and what's not taxable in each state. We could spend $40,000 to $50,000 in the first year between software and labor."

Even the largest web retailers also feel the pain, says Johnson of Overstock, ranked No. 31 in the 2013 Top 500 Guide. Overstock deployed sales tax collection software in early 2011 from Sabrix Inc., whose software has since been folded into the OneSource Indirect Tax software line from Thomson Reuters. Overstock currently collects sales tax in its home state of Utah, as well as Kentucky, Colorado, Oklahoma and North Carolina.

Johnson won't say what price Overstock paid for the licensed software, but noted it was "not significant" when compared with the extensive resources required to make it work. "We threw 20 to 30 software developers on it, and we spent 9,412 person-hours to complete the installation and testing of the software," he says. Thomson Reuters says that retailers generally take between two and six months to deploy its sales tax software, using personnel from multiple teams including information technology departments and tax managers. It says it also offers an Internet-hosted version that cuts up to 20% off the implementation time.

One of the most difficult and time-consuming parts of implementing sales tax software is connecting each product category, and in some cases individual product SKUs, to the correct classification in a tax software application for each state. That's largely a matter of pulling down data menus for each product category as well as for some individual SKUs.

Once a retailer connects its product database in that way, the software, at least theoretically, is designed to handle the rest. Tax software vendors say they are set up to get constant updates of sales tax rules from each state with a sales tax law, covering all the local jurisdictions within each state.

Robb McCarter, director of e-commerce at e-retailer Edwin Watts Golf Shops LLC, who has been involved with e-commerce technology since the late 1990s, says sales tax software's functionality and accuracy has improved over the past several years. "There can always be a fly in the ointment anywhere, but we trust the vendors to keep their software up to date," he says. The retailer uses sales tax software from Avalara to manage sales tax collection in its physical stores, while relying on CyberSource Corp. software in its UniteU e-commerce platform for managing sales tax collection on its e-commerce site.

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