The increase in the number of people shopping online in the past few years has fueled a significant growth in global ecommerce. In today’s market, with an annual growth rate of 9.49% set to drive a market volume of $6,478 billion by 2029, expanding beyond borders has transformed from an opportunity into a critical driver of growth.
However, for ecommerce businesses like Shopify merchants, dealing with complex tax regulations across different countries and regions can be challenging. You need to stay on top of constantly changing regulations to avoid costly errors and ensure tax compliance.
The Complexities of Global Tax Compliance
Cross-border tax compliance can quickly become overwhelming for several reasons. Here are some of them:
1. Variability in Tax Laws
Many businesses already consider tax compliance tedious and challenging. When you expand globally, this becomes more daunting with how much international tax regulations vary. Each country has its own set of tax rules, rates, and reporting requirements that can differ significantly.
For example, in the United States, there are different sales tax rates and requirements for every state, county, and even city. As the merchant, it is up to you to figure out what you need to collect and where. On the other hand, the European Union operates under a value-added tax (VAT) system, which requires sellers to charge VAT based on the buyer’s location and remit it accordingly.
This complexity grows further for merchants involved in dropshipping, a business model where the manufacturer or another business fulfills orders directly, creating multiple transactions between the seller, customer, and manufacturer. Each step can affect tax calculations, as taxes depend on two sales—manufacturer to seller and seller to customer.
These differences create a constantly shifting landscape where the rules in one country might not apply in another. Suppose you’re a Shopify merchant expanding internationally. In that case, this means adjusting your tax calculations and reporting practices for each market you enter—a task that can become resource-intensive and error-prone.
2. Risk of Miscalculations
The variability in tax rates and regulations increases the risk of errors in tax calculations and delays in compliance. Unfortunately, these may lead to fines, penalties, and even reputational damage.
Manually handling different tax calculations is time-consuming and increases the chances of errors. Even minor mistakes can result in hefty penalties or disrupt business operations, further leading to delayed payments, disputes, or unexpected audits.
3. Resource Constraints
All the complexities brought about by managing cross-border transactions can be a strain on resources. You will need to delegate staff for researching, calculating, and reporting taxes for multiple regions. This takes time and energy away from other critical tasks, slows down your business operations, and makes it harder to scale efficiently.
How Avalara Simplifies Cross-Border Compliance
A tax automation solution like Avalara can help you overcome the challenges that come with cross-border compliance. As a built-in integration for Shopify Markets, Avalara AvaTax seamlessly integrates with any Shopify store and provides a frictionless online shopping experience for your customers.
Here are the key benefits of using Avalara for automated tax management:
Real-Time Tax Calculation and Automation
Avalara, with its industry-leading artificial intelligence engine and global content database, accurately calculates any taxes, as well as landed cost estimates at the point of sale.
Its acquisition of 3CE Technologies in 2021 has allowed Avalara to automate its HS code classification services, a global product classification system used for product exports. This integration with 3CE’s HS code classification automates the process of identifying and mapping tariff codes to products.
As customers shop online, Avalara automatically calculates applicable duties and taxes based on their location and the items in their cart. This allows you and your customers to see all associated costs with the transaction and provides a better checkout experience.
Staying Up-to-Date with Global Regulations
To ensure correct calculations, Avalara’s robust platform continuously monitors and updates tax rules, rates, and regulations as they evolve. This means that you can confidently sell in multiple markets without worrying about outdated compliance information.
Seamless Remittance and Reporting
In addition to calculating taxes, Avalara simplifies the remittance process by automating the filing and payment of taxes to the appropriate authorities. You may also generate reports to get detailed insights on your tax obligations to help you maintain tax compliance.
Best Practices for Managing Tax Compliance
Managing tax compliance across different regions and countries can be challenging but following best practices can help streamline the process and minimize negative impact on your business. Here are some key strategies you can use:
- Keep your product catalog updated: Different products and services have different tax rates depending on region. Maintaining an up-to-date product listing will contribute to accurate and timely tax classification.
- Integrate automatic tax solutions early: Using a tax automation tool like Avalara at the start of your business expansion will help make the transition smoother. It will also ensure that your tax obligations are accurately managed from the start and that your business is tax-compliant.
- Stay informed of regulatory changes: With the constantly evolving tax regulatory landscape, it is essential to stay informed about changes to ensure continued compliance. Leverage resources such as tax automation tools that constantly update their database with new tax rules, like Avalara.
- Conduct periodic compliance audits: Regular compliance audits can help identify potential gaps in your tax management process. This will allow you to address any issues before they become costly to fix.
- Maintain transparent records: Whether for tax compliance or other purposes, keeping transparent records is good business practice. This will simplify any reporting process and provide you with better insights into your business.
Avalara Case Studies and Real-World Examples
To understand how Avalara’s tax automation solutions simplify cross-border compliance, it’s helpful to look at real-world success stories. These case studies highlight how Avalara has supported businesses of different sizes and industries to overcome tax compliance challenges and scale their operations.
Iconic London: Enhancing International Growth
Founded in 2015, ICONIC London is a prominent brand known for its glamorous makeup and luxury skincare products, all made without harming animals, ensuring a cruelty-free stance. As the company transitioned to an e-commerce model in the U.S., it faced the daunting task of filing sales taxes in 28 states almost overnight, despite being a small company with only about 40 employees and a limited finance team.
To navigate these challenges, ICONIC London chose Avalara for its seamless integration with their Shopify platform. Avalara AvaTax automates tax calculations at the point of sale, while Avalara Returns manages monthly tax filings, significantly simplifying compliance.
Ann Masson, CFO of ICONIC London, emphasizes that Avalara’s support was crucial for their successful expansion into the U.S. market, allowing them to focus on growth rather than manual tax processes. As the company looks toward future expansions, Ann remains confident in Avalara’s ability to facilitate their ongoing tax compliance needs.
Boll & Branch: Navigating Compliance Through Rapid Growth
Founded in 2014, Boll & Branch began with a mission to create luxury, sustainable sheets, and has since expanded to clothing and accessories. Initially, the company managed tax compliance in New Jersey and California, where processes were time-consuming and prone to complexity, especially with California’s demanding tax requirements. The company’s tax liabilities expanded further with the 2018 South Dakota v. Wayfair, Inc. ruling.
To streamline the new demands, Boll & Branch turned to Avalara’s tax automation solutions. After moving to Shopify, they implemented Avalara AvaTax for real-time calculations and Avalara Returns to handle multi-jurisdictional filings. Avalara’s State Sales Tax Registration service also reduced the administrative load by managing registrations in new states.
With Avalara in place, Boll & Branch’s team now handles compliance efficiently, giving them more time to focus on growth. Controller Robin Hecht noted, “I don’t lose sleep worrying about late or misfiled taxes and penalties,” highlighting Avalara’s role in providing both operational ease and peace of mind.
Berkshire Blanket & Home Co.: Scaling Tax Compliance With Ecommerce Expansion
Since its founding in 1993, Berkshire Blanket & Home Co. has become a leader in premium blankets and soft home goods, distributing over 130 million products to top retailers worldwide. Initially focused on wholesale, Berkshire managed tax compliance manually with a custom system.
However, when the company expanded into consumer ecommerce, its manual tax matrix struggled to keep up with the complexity of retail tax obligations. Recognizing the need for a robust system, Vice President of Marketing and Digital Emily Pfeiffer sought a reliable tax solution to manage their growing multi-state requirements.
When the company decided to transition to Shopify Plus, Avalara’s built-in integration became a key factor in the platform choice. Emily explained how Shopify’s built-in Avalara integration was a key factor in their decision, “We just set it up once and forget it. And Avalara was more of a partner than we expected during the transition, offering us the support we needed.” Automating tax compliance with Avalara AvaTax and CertCapture has reduced manual effort, allowing Berkshire to gain confidence in their compliance and focus on their growth.
The Path Forward
Navigating the complexities of cross-border tax compliance can be overwhelming for Shopify merchants and e-commerce businesses, but leveraging a tax automation solution like Avalara can make all the difference. It allows businesses to focus on growth without the burden of manual compliance efforts.
In today’s fast-paced global market, having a reliable tax management tool is not just a convenience—it’s essential for sustainable international expansion. With Avalara integrated into your Shopify store, you can manage tax compliance effortlessly as you scale internationally. Explore how Avalara can support your business growth and simplify compliance by clicking here.