Together with Vertex

We’ve all gotten a bad gift. I would argue this is one of the few experiences that unite us as humans. 

Maybe you’ve gotten that “hilarious” Chia Pet shaped like Bob Ross as a gag gift in your company’s holiday grab bag. Or maybe your well-meaning mother-in-law got you a mashed potato-scented candle because, you know, you were a little too enthusiastic about complimenting hers at Thanksgiving. Or maybe, just maybe, you’re like my sweet yet dangerously blunt husband who has received an onslaught of cable-knit, itchy sweaters from my Nana over our 15-year relationship. I know I look back fondly on the denim pageboy hat I received that was scarily reminiscent of Britney Spears’ Y2K fashion era.

(And if you can’t possibly recall ever receiving a bad gift, maybe you’re the one always giving them? Just a thought.) 

We know that returns are common. Most of us (if not all of us) have returned an item in the past. So why are we as operators surprised—or worse, completely unprepared to handle them—especially during the holidays, when bad gifts are more likely to rear their ugly heads? Now is the time for merchants to prepare for the headache that is “Returnuary” – the post-Christmas period when consumers flock to stores and their shipping company of choice to return the gifts they just unwrapped. It’s a holiday hangover of sorts that can create customer frustration and open your business up to major tax compliance issues if you don’t have a plan in place.

What can you expect this holiday season?

First, let’s start with the good news: the retail industry is expected to see growth this holiday season, with online sales seeing the most significant uptick. Bain forecasts that U.S. merchants will see 3% growth, with 90% of that growth coming from non-store sales. Deloitte is projecting a slightly higher increase (4% to 5% to be exact), with eCommerce sales rising between 10% and 13%.

These numbers seem great considering the moderate results we’ve seen this fiscal year, right? Well, there’s some fine print: companies like Salesforce are predicting an earlier start to the holiday season, with consumers hunting for the best deals. eCommerce, of course, is a big enabler of these price-hunting behaviors. These two realities together mean that the holiday hangover of Returnuary is going to be especially harsh this year.

We can look at return rates for the 2022 holiday season as a clue. According to the NRF, 17.9% of holiday sales were returned, amounting to millions in lost revenue.

Up to 88% of global retailers said they plan to tighten up their policies to minimize or completely prevent returns. For some, that has meant shortening the window for accepting returns; for others, it has meant charging for returns.

This boomerang effect of sorts makes us question the long-term viability of these stricter return policies. After all, retailers had to make their delivery and returns policies so flexible during COVID-19 simply to keep their businesses going. And this flexibility has been happening for so long, they have essentially reprogrammed our expectations. Now, consumers expect easy and flexible returns, no matter when or where they make the purchase.

Forward-looking brands and retailers are taking note and are ensuring their backend systems are equipped to process, manage, and facilitate flexible returns. That way, the process is easy for customers and efficient for the business. After all, a customer’s quick trip to drop off a return at the local UPS store can be incredibly burdensome for a retail business. Tax reporting is especially time-consuming and error-prone for returns–and the more channels you use to sell to consumers, the more complex the process will be. 

Make sure you’re prepared for Returnuary. Download Vertex’s eBook, Are You Ready for “Returnuary”? 8 Ways Tax Affects Holiday Gift Returns.

8 Ways Tax Affects Holiday Gift Returns

Shoppers must be refunded the tax they paid at the time of the purchase 

Merchants must be able to pinpoint the exact tax that was paid at the time of the purchase based on tax nexus. (FYI: that’s the historical tax rate.) Having that historical insight is the only way to accurately calculate how much sales tax to refund to your customers. If you’re coming up empty-handed, you’re not alone. A lot of smaller merchants simply don’t keep a database of historical tax rates for every jurisdiction where they are selling, preventing them from giving consumers an accurate refund and opening them up to legal risk. 

Tax policies differ by state and country, which creates a lot of complexity

This makes things especially tricky for any brand that has an e-commerce presence. Whether you’re omnichannel or online only, you need to know how tax policies vary by state and country. That means you need to accurately assign tax nexus to each purchase – not just where you reside but anywhere you may sell. 

You also need to consider different tax rates by state and territory based on the product you’re selling and where consumers may return your product. For example, apparel retailers should know that clothing doesn’t receive a sales tax in the states of Delaware, Montana, New Hampshire, and Oregon.

These statewide intricacies don’t just impact your sales tax refunds. You also need to claim back the tax you reported and remitted with that return. In some states, sellers must amend past returns, and in others, sellers can take a credit. Some merchants avoid this complexity altogether by absorbing the refunded tax, but this leaves a lot of money on the table.

Disconnected systems mean inaccuracies are likely

Whether an item is purchased in a store, online, or a hybrid of the two, sales taxes must be collected and tracked consistently. But if you’re using different systems to handle different channels – like if you’re e-commerce platform doesn’t integrate with your ERP or in-store POS – that makes tax reporting even more difficult. 

These disconnects will increase the likelihood of reporting inaccuracies, which means you’re vulnerable to future audits and fines. (And let’s be real, that’s the last thing small and growing businesses need, especially in this economic climate.)

If you offer multiple returns options, tax is even more complicated

Consumers have different channel preferences depending on their needs at a particular time. That’s why many merchants are giving them more ways to complete returns – either in a store, through direct mail, or through marketplace partners like Amazon and eBay. But that flexibility ultimately creates complexity if you’re manually tracking your tax obligations.

Governments need to generate revenue, so the risk of an audit is likely

Sales tax makes up as much as 42% of total tax revenues in some states, which means tax collectors are incentivized to turn over every possible stone to uncover unpaid sales taxes and dole out penalties. 

Small and mid-sized retailers can’t afford to get bogged down with the stress and potential economic fines of audits. But frankly, they’re the most likely targets. If you’re in this camp, correct tax calculations can significantly reduce the number of errors auditors find.

Make sure you’re prepared for Returnuary. Discover the remaining holiday return tax challenges by downloading Vertex’s eBook, Are You Ready for “Returnuary”? 8 Ways Tax Affects Holiday Gift Returns.