Online Sales Tax Trends in 2024: Embracing Futuristic Technology for Compliance Challenges

As we delve into the sales tax trends of 2024, it's crucial to explore how futuristic technology is poised to revolutionize compliance efforts for businesses.

Alongside the major changes in sales tax policy and compliance challenges, there lies a realm of innovative solutions driven by cutting-edge technology.

From Artificial Intelligence (AI) and Machine Learning (ML) to Blockchain and Robotic Process Automation (RPA), these advanced tools offer unprecedented opportunities to streamline tax compliance processes and navigate regulatory complexities with ease.

In embracing these technologies, businesses are poised to navigate the evolving sales tax landscape of 2024 and beyond with confidence and efficiency, ensuring compliance amidst regulatory complexity while unlocking new opportunities for growth and innovation.

Sales Tax Trends in 2024 and the Ensuing Compliance Challenges

The year has been characterized by major updates to sales tax laws in the US and the subsequent scramble by tax compliance technology companies to catch up for the sake of their retail customers.

Let’s first look at the major changes to sales tax policy in the US that will have an impact on your business in 2024 and the coming years.

The Introduction of New Tax Types

Multiple states, including Colorado, New York, and Minnesota have introduced their own versions of retail delivery fees. The fee is expected to apply to all deliveries made to a location in the state, where at least one tangible personal property item is subject to sales tax. Moreover, dozens of states and localities have introduced a bag tax. While these charges may not end up significantly impacting the consumer, retailer’s compliance efforts are set to become way more complicated.

Sellers in Chicago meanwhile need to adhere to the Chicago Lease Tax or the Personal Property Lease Transaction Tax, which is applicable to remote sellers. Companies, including the ones selling digital goods, such as SaaS products, with sales in Chicago over $100,000 are subject to the tax. Meanwhile, Michigan, in July 2023, clarified it will tax cloud computing solutions with a downloadable component as prewritten software.

Further, states are introducing legislation that will have an impact on interstate or global commerce. For instance, states like South Dakota and Louisiana removed the 200 transactions requirement from the economic nexus threshold back in 2023, following many other states that got rid of the transaction requirement back in 2022.

Changes in Sales Tax Regulations

Essential items, including diapers, tampons, and groceries are beginning to attract sales tax exemptions in various states. States like New York are also planning to bring down the sales tax rate for small, independently owned and operated retailers from 4% to 2.5%.

Apart from the state-wide changes proposed for sales tax rates, home-rule sales tax has emerged as a major pain point for retail businesses, as they have to register with the state department of revenue along with the local tax authorities to remit their taxes.

Notably, the home-rule states of Alabama, Colorado, Alaska, Arizona, and Louisiana have a vast number of locality-wide sales tax rules that businesses have to comply with.

Increase in Tax Holidays

Worries that are constantly hanging over retail consumers, such as high inflation, job insecurity, etc., have prompted states to roll out more tax holidays than ever before. For instance, weather preparedness and back to school sales tax holidays have been rolled out consistently to incentivize retail consumers to spend money and bolster the economy. In 2023, there were at least 45 tax holiday days across the country.

The challenge for retailers is that these tax holidays aren’t announced early enough for them to prepare their compliance measures. They are also unpredictable, and retailers that have nexus in multiple states and have to comply with different sales tax holidays find it incredibly difficult to stay on top of the situation.

Challenges to Marketplace Facilitators in the Platform Economy

Another major trend is states pushing marketplace facilitators and e-commerce sites to collect and remit sales taxes on behalf of the third-party sellers using their platforms. It is worth mentioning that the definition for marketplace facilitator varies across states and many sales tax jurisdictions don’t provide proper guidance on how tax is to be collected for services, such as food delivery, ride-sharing, etc.

Also, for tax year 2024, states are expected to massively change 1099-K reporting requirements for online marketplaces and third-party settlement organizations, bringing the reporting requirement from $20,000 in aggregate income and over 200 transactions to $5,000 (without any transaction threshold).

Real-time Compliance or E-invoicing

Taking inspiration from the EU, US businesses are also moving towards a unified e-invoicing solution, which means retailers can issue their invoices in a structured, machine readable format that can be directly reported to the government for compliance purposes, irrespective of the in-house retail tax compliance system in use.

Compliance and Tax Management Capabilities of Existing Technology

Existing technology for handling US sales tax laws offers a range of features and functionalities designed to streamline compliance processes for retailers.

These include:

• Economic Nexus Tracking: Monitoring sales and transaction thresholds to determine nexus obligations.
• Automated Compliance: Automating tax calculations, rate collection, and filing across multiple jurisdictions.
• Multichannel Sales Management: Simplifying expansion to new markets and scaling operations efficiently.
• Integration Flexibility: Integrating seamlessly with various e-commerce platforms and systems.

Despite their capabilities, existing systems face several challenges in keeping pace with the evolving sales tax landscape in the US:

• New Tax Types: Difficulty in accommodating new tax types, such as retail delivery fees and bag taxes, leading to compliance complexity.
• Changes in Regulations: Inability to adapt quickly to changes in sales tax regulations across states, including exemptions and rate adjustments.
• Tax Holiday Management: Challenges in managing and preparing for unpredictable tax holidays, especially for retailers with operations in multiple states.
• Marketplace Facilitator Requirements: Struggles in complying with varied definitions and reporting requirements for marketplace facilitators across states.
• Real-time Compliance and E-invoicing: Lack of capabilities to support real-time compliance and structured e-invoicing, hindering adaptability to emerging compliance standards.

Emerging Trends in US Sales Tax Technology: A Glimpse into the Future of Addressing Compliance Pain-points

As the sales tax requirements in the US continues to evolve, it's crucial to anticipate the next big trends in compliance technology. Systems Guild offers insights into upcoming innovations poised to alleviate pain points caused by new sales trends, empowering retailers to navigate regulatory complexities.

Leveraging AI and ML for Enhanced Sales Tax Compliance

Artificial Intelligence (AI) and Machine Learning (ML) technologies are heralding a new era of efficiency and precision. These cutting-edge tools offer innovative solutions to address the challenges posed by emerging sales tax trends, providing unparalleled levels of accuracy and compliance.

AI enhances sales tax compliance by automating tasks, improving accuracy, and accelerating tax research for accurate, efficient results.

One of the primary strengths of AI in sales tax compliance lies in its ability to streamline tasks and enhance accuracy. By automating tedious tasks such as identifying deductions, automating repetitive processes, and ensuring precise tax calculations, AI-powered tax software significantly reduces the burden on professionals. This automation allows tax professionals to focus their efforts on addressing intricate tax issues with enhanced attention and expertise. Additionally, AI's capability to offer both quantitative and qualitative insights accelerates tax research, delivering results with remarkable accuracy and speed, thereby ensuring compliance with evolving regulations.

The emergence of pioneering tools such as TaxJar’s Emmet, Avalara ChatGPT Plugin, and Stripe's AI Tax Solution exemplifies the transformative impact of AI and ML in sales tax compliance. These advanced solutions redefine the landscape of tax management by offering seamless integration with e-commerce platforms and providing advanced functionalities such as AI-driven categorization, real-time tax calculation, and personalized tax estimation.

Blockchain for Transparency and Accuracy

Blockchain technology offers significant advantages to retailers in enhancing transparency and accuracy in tax compliance. By providing immutable records of financial transactions, blockchain ensures the reliability and trustworthiness of tax records. This technology simplifies tax holiday management by enabling real-time tracking of transactions, allowing retailers to accurately monitor sales and purchases during these periods.

Additionally, blockchain facilitates compliance with diverse tax regulations by providing a transparent and auditable record of transactions, thereby helping retailers demonstrate adherence to various tax laws. Moreover, blockchain assists retailers in navigating complex tax rules in different jurisdictions, automating tax reporting processes and ensuring compliance even in areas with intricate regulations. Beyond these benefits, blockchain streamlines audit processes, prevents fraud, facilitates cross-border transactions, and builds customer trust by ensuring transparency and accuracy in tax compliance.

Cloud-Based Solutions for Accessibility and Security

Cloud technology will enable retailers to overcome the limitations of outdated on-premises systems by offering scalability, real-time updates, and advanced security measures. Cloud-based solutions will facilitate real-time compliance and e-invoicing, empowering retailers to issue structured invoices directly to the government for compliance purposes. With cloud-based tax compliance systems, retailers can adapt quickly to emerging compliance standards and streamline compliance workflows across multiple states.

Robotic Process Automation (RPA) for Efficiency

Robotic Process Automation (RPA) presents a transformative solution for enhancing sales tax compliance processes. Through automated data categorization, organization, and documentation, RPA streamlines tax filing procedures, enabling retailers to efficiently manage compliance with marketplace facilitator requirements. Additionally, RPA facilitates the seamless integration of reporting processes for online marketplaces and third-party settlement organizations, ensuring accurate and timely compliance with evolving tax regulations. By leveraging RPA, retailers mitigate the risk of non-compliance penalties, as the technology ensures precision and consistency in tax filings.

Conclusion

It's evident that businesses face complex challenges in adapting to regulatory changes and emerging technologies. From the introduction of new tax types to the push for real-time compliance and the rise of marketplace facilitators, retailers must navigate a rapidly evolving landscape.

However, amidst these challenges lie opportunities for innovation and growth. By embracing futuristic technologies such as AI, ML, Blockchain, and RPA, businesses can streamline processes, enhance accuracy, and stay ahead of compliance requirements. These technologies offer solutions to the limitations and challenges posed by new sales tax trends, empowering retailers to navigate the complexities of tax compliance effortlessly.

As businesses strive to modernize their retail tax systems to meet the demands of today's dynamic landscape, Systems Guild stands ready to assist. With our expertise in retail tax system modernization, we provide customized solutions and consulting services that bridge the gap between existing software and unique tax needs. Together, we can navigate the future of retail tax compliance, ensuring compliance, efficiency, and growth in the years to come.