The Series B round for Witherspoon’s Draper James brand was led by San Francisco-based Forerunner Ventures.
The sound and the fury over charging sales tax on Internet purchases is abating. For some time, surveys have shown consumers don’t care about paying sales tax online. Now retailers’ experiences are catching up with survey results. “Customers are not shopping with us online to avoid tax,” Lands’ End CFO Don Hughes said at the recent eTail 2003 East conference. “Charging sales tax has a small impact that goes away in six to nine months.”
The decisions this year by Wal-Mart Stores Inc., Target Corp. and other major retailers to charge sales tax on web purchases cemented the issue. “Retailers have concluded that with the majority moving to the other side, they might as well collect taxes, too,” says Steve Rodgers, product manager for the sales tax group of CCH Inc. Even if they don’t really want to: “It’s better not to attract auditors’ attention because you’re the only one not charging sales tax,” Rodgers says.
So now, the only questions left are how to execute. “Retailers need to set up business rules about taxation,” Rodgers says. “But that’s where it can get really complicated. Retailers will have to make a lot of decisions, most having to do with the types of products they sell.”
Solving the complexity
One of the arguments against collecting online sales tax was the complexity of doing so. For starters, a state can tax different products at different rates. So a retailer needs to collect one rate on food, possibly another on consumer electronics and yet another on books, and on and on. In addition, states charge different rates from one another and they all have different exemptions. Retailers face thousands of tax rates from 7,000 taxing jurisdictions.
In this age of technology, though, software has solved the complexity problem. In the case of CCH, it’s a product called CertiTAX, a sales-tax calculation system that contains local tax rates cross-referenced with products. CertiTAX, the outgrowth of software developed by esalestax.com which CCH acquired two years ago, provides e-retailers with the appropriate tax rate in less then a second at a cost of pennies a transaction.
Retailers still need to make judgments, however, as to which category a product falls into: For instance, is a vest an apparel item or an accessory? Although retail chains make those tax decisions already, it’s not simple to apply decisions and software from the chain to the web, Rodgers says. For one thing, systems that communicate with POS devices for sales tax purposes often can’t talk to web-based ordering systems. For another, taxing information for different jurisdictions often resides at the store and is not easily communicated to a web checkout system. On top of that, tax information for a web operation must reside in a single database.
Although some large customers license and install the software, most buy the CertiTAX service on an ASP basis. “The biggest hassle of any sales-tax calc software is the integration into existing systems,” Rodgers says. “CertiTAX needs very little, if any, integration.”
Further, with the ASP model, a retailer doesn’t have to keep up with changes in tax rates. “You don’t have to deal with the maintenance of the calc system,” Rodgers says. “All that hassle is put on us.”
The other half of the equation
But calculating the tax and collecting it from customers are only half of the complex sales tax equation. The other half is remitting taxes. That’s where CCH’s ZIPsales Returns product comes in. Also sold on an ASP basis, ZIPsales Returns feeds all the taxes that a retailer has collected into a program that calculates the amount due each jurisdiction, then maps payments into a program that reports how much is due and where to send each payment.
Just like the rest of the tax issue, that’s not as easy as it sounds. Some jurisdictions want retailers to remit directly to them; others allow retailers to pay to a state fund. The average retailer files 400 to 500 returns a month, but that number can range from 150 to 12,000, Rodgers says. The average customer using ZIPsales Returns pays $2,000 to $2,500 in set-up fees, then an annual subscription fee of $7,500 to $8,000, Rodgers says.
The market for tax systems will only grow as more retailers charge web sales tax. Lands’ End’s Hughes noted that as a subsidiary of Sears Roebuck and Co., Lands’ End now must charge tax on almost all sales, whereas it charged on only a minority before. “In the past we collected tax only in six states where we had nexus,” he said. “Now we collect tax in all taxing jurisdictions expect the District of Columbia where Sears has no stores.” Lands’ End surely will not be alone in spreading out-and dealing with-the tax burden.