In “The Taxman Cometh Part 1″ we talked about the background on the Main Street Fairness Act and how it affects online retailers. In this post we explain what other costs a retailer may incur include:

All of the requirements from the Main Street Fairness Act will mean time and costs to online retailers. Let’s face it, online retailers will NOT try to directly interface with the 46 different “free” software applications offered by the states. It is just too complex. Retailers will instead use one of the tax rate aggregators that provide this service. Aggregators require that the retailer pass information about all of the products and services that are on an order. This information includes whether or not a particular item is taxable in a particular jurisdiction. Of course, some items are taxable in one jurisdiction, but not in another. The work to figure out whether an item is taxable falls on the retailer, not the aggregator.

Further, retailers will need to integrate with the web site, the Order Management System, and possibly a separate accounting system with the aggregator. Other costs a retailer may incur include:

• Architectural costs to allow for the input and maintenance of the product level tax codes required by a 3^rd party system. A retailer with a home built system will have to make these modifications themselves. And this doesn’t include the OMS which will likely need even more modification.
• Implementation costs – there are several points in checkout where tax will need to be calculated or recalculated
• Integration costs – need to pass data and get data from a 3^rd party service. The site also needs to be programmed for what to do when a call fails.
• Data set-up costs (to code products with the correct codes used
• Aggregator maintenance, set up

In addition, every web service call made in checkout runs the risk of slowing down the transaction and causing some error message/failure. This creates friction in checkout that will likely reduce checkout completion.

Below are ‘estimated’ costs that we calculated:

Kalio is prepared to simplify

There is some light at the end of the tunnel. Kalio recently spent thousands of dollars to modify its underlying architecture and build an adapter to third party aggregator software, which as you can see above, would be a huge cost and burden for online retailers.  Kalio did NOT pass this cost along to the retailers using their system. Many websites in the $2-50MM range have built their own eCommerce system…these companies will need to make these modifications at their own expense.

There has been big news regarding the Internet Sales Tax Bill, also known as the Main Street Fairness Act that is front and center on the minds of online retailers and how it will impact their businesses.

Quite frankly, passing the Main Street Fairness Act bill will require a lot of work and a lot of cost! While we hope the House dramatically simplifies the requirements for online retailers, Kalio already did the work to be ready for a full-blown sales tax integration.

Background on the Main Street Fairness Act

About ten years ago a number of big box retailers, including Walmart and Target, began pushing Federal legislation that would require internet (and catalog) merchants to collect sales tax on all transactions that ship to places where a sales tax is due. Their bill, called the Main Street Fairness Act, has been voted down many times over the years in Congress.

The Senate took up this bill about a month ago. The Democratic leadership scheduled it for a vote without any debate or allowing any amendments. It passed with 68 votes.

The “pro” side of this bill focuses on the “unfair” advantage internet sellers have because they don’t have to collect sales tax. They also have stated that it will be “easy” for retailers to collect the tax because each of the 46 states with a sales tax will provide their own “free” software for tax calculations to merchants. However, it’s not as ‘easy’ as they make it seem.

The bill the Senate passed requires retailers to collect and remit sales tax in 46 states to 7900 taxing authorities (many counties and cities have an additional sales tax on top of the state rate) and to 551 Indian tribes. This doesn’t sound very ‘easy’ to us. Note: The bill exempts retailers with less than $1MM in annual online sales.

How does this affect online retailers?

All of these requirements will mean time and costs to online retailers. Let’s face it,online retailers will NOT try to directly interface with the 46 different “free” software applications offered by the states. It is just too complex. Retailers will instead use one of the tax rate aggregators that provide this service.  Aggregators require that the retailer pass information about all of the products and services that are on an order. This information includes whether or not a particular item is taxable in a particular jurisdiction. Of course, some items are taxable in one jurisdiction, but not in another. The work to figure out whether an item is taxable falls on the retailer, not the aggregator.

Keep an eye out for Part 2 of this post on what other costs a retailer may incur include…