SEARS SOLUTION TO A TAXING PROBLEM
Byline: Brad Barth
NEW YORK — Two software solutions, implemented by Sears, Roebuck & Co. to calculate state and local sales taxes and report the retailer’s tax liabilities, have rationalized the increasingly complex task of tax collection and disbursement in the burgeoning age of Internet retailing.
The solutions have gone a long way in helping Sears reduce inadvertent misallocation of tax disbursement that often results in overpayments to state agencies, and also reduce underpayments followed by interest charges. It’s an administrative challenge for all multistate retailers.
Chip McClure, Sears’ director of sales and gross receipts tax, said inconsistent procedures in the past led to clerical mistakes. “Now we feel we’ve corrected that almost 100 percent.”
Prior to implementing these systems, said McClure, “We had accounting people in our unit whose responsibility was to ensure that correct rates were used by local salespeople. Then they reported that data to us on a piece of paper. It was a manual and labor-intensive way of collecting and reporting taxes.”
Determining what tax laws correspond to each item a shopper purchases can become complicated when stores, inventory or employees are located in one state but products are shipped to another. A tourist purchasing an item at an Illinois store but shipping it home to New Jersey, for example, is not subject to Illinois state tax because he takes possession of that item in another state.
Sears incurs myriad tax liabilities as it delivers products across all 50 states, including sales and usage taxes charged to customers for products ordered from its stores, catalog and Web site, which it must then pay to each local tax jurisdiction.
McClure said that the first question to consider when Sears ships an item to another state is, “Is it an origin state or a destination state?” In other words, some states levy taxes on a product based on where it’s shipped from; others levy taxes based on where the product is being delivered.
Sears uses a front-end, point-of-sale tax system from Taxware International of Salem, Mass., to apply the appropriate taxes. Whenever an order is placed, one of three Sears data centers accesses the software to verify the ordered product’s ship-from and ship-to addresses.
If the two locations are within separate tax jurisdictions, the software then verifies the geographic code of the point of delivery. The geographic code determines the appropriate tax rate for products delivered to that area. The system then calculates the taxes and the data is stored in a file for later use.
Sears also runs back-end software from RIA of New York, to report tax information and ensure that each tax jurisdiction is paid the correct amount. The solution actually drafts the tax returns and helps prevent potential overpayments or underpayments, the latter of which could prompt an audit.
Because it uses software from two separate companies, Sears created its own business component integrator to translate coded tax information from its front-end to its back-end software.
Sears implemented the combined solutions several years ago, long before it went live with its electronic commerce Web site last year. But the solution is even more relevant currently, with the growth of electronic commerce, McClure said.
“Those of us in the tax business knew that the solution would take care of Internet sales, but we had to convince people in the overall retail business that it was the best solution for them to use and to incorporate into the routine,” said McClure.