As an increasingly global shopping solution - which lives at a somewhat new intersection of online and offline shopping - it's always been unclear how sales tax liability moves from one party to another across our transaction platform.
If a transaction happens on a brand website for a local pickup at a nearby store, but the local retailer fails to submit the appropriate sales tax, exactly who is liable? If someone requests a delivery on a locally-powered landing page that they saw on Google, but the delivery address is different from the store address - or perhaps it happens on a sales tax holiday, who should pay those taxes?
It would be great to exist in a way - like early ecommerce merchants and marketplaces - actively oblivious to our responsibilities around facilitating the collection and submission of sales tax, but that's simply not who we are. We started this company to empower local communities, and ensure that money (including sales tax) spent in a community stays in that community.
Here’s what this looks like from our viewpoint:
In 2020, we were made aware of potential tax loophole issues in conversations with multiple retailers and brands. It was clear that marketplaces and facilitators like Airbnb and Ticketmaster did collect and submit sales taxes for goods and services purchased through their platform. Internally, we wondered whether we could count on 100% of our retailers to perfectly adhere to local tax requirements.
So, we invested time and money with sales tax experts who could help us determine the best path forward. To be honest, when we started that research, we didn't expect to end here. The amount of work involved was immense. The costs were substantial. But, we all knew it was really the only path forward.
We also struggled with a never-ending stream of sales tax exemptions and custom tax rates for different product classes. Say, for instance, that a state has a sales tax holiday, do we remind every retailer in that state to change their tax rates for the weekend and a few days later restore them to normal? What about in smaller jurisdictions? What about unique rates for specialized products? The variations are essentially endless - but we still needed to present and collect sales taxes at the point of sale.
After much research, we arrived at a solution that ensures our compliance globally – but it requires us to intermediate taxes for shops. We can’t just calculate the taxes for the sale and hope that the retailer charges the same taxes when s/he enters the sale into their accounting systems - or pays the bill. We need to actively facilitate the whole process.
While we recognize that 99% of our retailers will (and already do) handle sales taxes properly, just a few stores could trigger a nationwide state-level audit, for-which we would be ill-equipped to defend. We simply do not have reliable sales tax submission information from ~any~ of our thousands of retailer clients. While we trust all of them, that one store making a simple mistake could cause every dealer in that state that uses Locally to be forced into a sales tax audit for little to no reason. We do not want this to happen.
This process also does not require retailers to use any different processes for entering Locally transactions than they use now. When stores receive an incoming sale from us, they enter it into their Point-of-Sale normally; including the normal sales tax rate. We did collect it. We will submit it. We can (and will) document this for our clients.
The only bookeeping difference is that we will intercept and pre-pay all sales tax for PAID local pickups and requested same-day deliveries. Stores can just treat the process normally. At the end of the month, we will provide a statement of what has been collected and paid. We will break it down to amount collected and who it was paid to. Stores can just subtract that amount from sales tax remittance.
And, by tightly tying product taxonomy to a jusridiction's tax criteria, we can help merchants be much more accurate in both the tax charged and the amount paid. If there is a deviation between Locally and a store's POS, it is likely taxonomy-related. Our global partner, Avalara, maintains direct relationships with every tax collector and we’ve worked endlessly to ensure that these do not happen, but if there is a problem, alert us and we will edit the taxonomy for that product.
With this system in place for retailers and brands in North America, it will allow us to span our service to other stricter jurisdictions in Europe, Asia, and Austraila.
And, finally, it really isn't a question of whether we implement this. It's a question of when. We can do it now, proactively. Or, we can wait another year, pretending this isn't really going to be the outcome and then have to force 5 or 10 or 50 times as many stores to make these changes. We just don't think the latter choice is the right one.
We do recognize that our strategy won't be globally compatible with shops. We will work with everyone to ensure that they expereince the least amount of hiccups from these changes. If you have any questions, please reach out to your account executive or email@example.com.
Thanks and Happy New Year.
Mike Massey, Founder & CEO