Tax maze

By Amit Mathradas, President and COO, Avalara

The payments ecosystem has undergone rapid change over the last decade and even more so since the onset of the COVID-19 pandemic as digital commerce grew in popularity. Among the top changes is the widespread adoption of digital payments. According to McKinsey, more than four in five US consumers used some form of digital payment in 2021. But it’s not just that more payments are happening digitally – the role payments play in the customer experience has evolved fast.

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Consumers’ perception of shopping and what they expect from retailers has changed, emphasizing convenience and accuracy. As a result, we’ve seen the rise of payment options like buy now, pay later, embedded payment solutions, and cross-border payments. Because more commerce is happening online, the need for digital-first, flexible, and global payment options has become critical for retailers to keep pace and keep customers happy.

Yet with all the changes in the world of payments, many factors connect to and directly impact payments, like shipping and taxes. In the age of e-commerce, the impact shipping costs have on payments has grown. Likewise, just as the digitization of commerce has changed payments, it’s also transformed how businesses must think about tax, which can make or break the payment experience.

Tax is attached to nearly every payment, but the complex and changing nature of tax makes the role it plays in calculating payments critical. Here are some of the reasons why.

E-commerce is changing payments and tax

tax problems

It’s no secret that the world is shopping online. Whether it’s consumers browsing their favorite marketplace for the best deal or a manufacturer selling construction supplies through an online store, e-commerce has become the de facto choice for many shoppers. The impact on payments and tax has unfolded before our eyes.

E-commerce and the digital-first economy have increased the demand for convenience in every stage of the shopping experience. At the payment level, this means choice regarding payment type – credit cards, ACH payments, peer-to-peer platforms, embedded payment platforms, like PayPal or ShopPay, and more.

When it comes to tax, e-commerce has changed how authorities collect tax revenue from transactions. For example, in the US, economic nexus laws require online sellers to collect and pay sales tax based on where customers are located. Collecting tax on e-commerce transactions is not only complex – it has a direct impact on payment totals and accuracy. This is where the impact of taxes is most clearly seen.

If tax calculations on payment totals aren’t accurate, merchants are likely to be at greater risk in the event of an audit. Likewise, inaccurate totals at point-of-sale can lead to increased cart abandonment and poor customer experiences. Consumers will continue to demand accuracy of payments, meaning that getting tax right will be essential to positive customer experiences and reducing risk due to inaccuracies.

Global commerce is increasing cross-border payment complexity

tax puzzle

Digital commerce complexity isn’t isolated to domestic payments. According to Accenture, cross-border growth is twice that of domestic e-commerce. On the one hand, cross-border commerce is excellent news for businesses because there’s a larger market to target. However, it doesn’t come without challenges.

Businesses need payment options that best serve customers in all regions of the world. But, they must also be able to navigate the ins and outs of cross-border compliance. And, when it comes to cross-border, so much of the experience hinges on the accuracy of the total payment collected.

Cross-border compliance is challenging because it varies widely by country and jurisdiction. Businesses must navigate customs duties, import taxes, and differing tax types. Collecting the wrong amount of tax on cross-border payments can impact businesses in several ways, including delayed deliveries and unexpected charges upon delivery – neither of which deliver a positive customer experience.

It’s also important to note that cross-border compliance is a moving target. For example, just last year, the European Union introduced sweeping e-commerce VAT reforms that changed how cross-border sellers have to manage their compliance obligations.

Real-time payments and real-time compliance converging

cross-border tax problems

There’s a common theme in this conversation around payments and tax – change is inevitable. Due to our economy’s digital-first, always-on nature, much of the change we’re likely to see in the future will center around real-time transactions. On the payments front, this is starting to manifest in the form of real-time payments that are completed and settled instantly. On the tax front, real-time compliance is becoming more talked about – taking shape today in e-invoicing and live reporting.

While these two shifts to real-time aren’t inherently tied together today, that’s likely to change. In recent years, Massachusetts has proposed legislation that would accelerate the remittance of sales tax payments. While still conceptual, the proposal called for sales tax collected through credit cards and other electronic transactions to be remitted daily, directly impacting payment processors. We’re likely several years from real-time payment and tax being the norm, but we inch closer each day as digitalization continues.

The payments industry cannot avoid the impact of taxes. The rise of digital commerce has increased the need for diverse payment options and added complexity to tax. As consumer expectations around convenience and accuracy grow, ensuring the tax component of payments is always correct will take center stage for retailers and payment providers alike.

Amit Mathradas

Amit Mathradas is President and COO at Avalara. He manages growth operations at Avalara, overseeing sales, marketing, business development, customer experience, and professional services. Before Avalara, Amit was general manager and head of the small and medium business segment for North America at PayPal.

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