Just as COVID-19 has led to a sharp rise in online retail, the pandemic has caused an increase in B2B e-commerce. In fact, according to a recent survey by Digital Commerce 360, close to 60% of B2B buyers now transact at least a quarter of their business through online B2B marketplaces. Increasingly, businesses are cutting out intermediaries and buying online directly from distributors, manufacturers, and suppliers. It’s convenient, quick, and often a less expensive option, so long as exempt sales can be validated.
Global trends in B2B e-commerce
2019 experienced great growth in business-to-business (B2B) e-commerce, and a 2019 study predicted global B2B e-commerce would be double business-to-consumer (B2C) ecommerce by 2020’s end. COVID-19 is accelerating growth because online buying allows businesses to minimize in-person sales. The pandemic could help global B2B e-commerce reach $20.9 trillion by 2027. In the United States alone, Forrester Research now expects online B2B sales to reach $1.8 trillion, or 17% of all B2B sales, by 2023.
To handle such growth, B2B e-commerce sellers need to put processes in place to streamline online buying.
Exempt transactions complicate e-commerce
Most B2B transactions qualify for a sales and use tax exemption, but that doesn’t mean they’re statutorily exempt. To validate a tax-free sale of a taxable good, the seller must obtain an exemption or resale certificate from the buyer. In the absence of such a certificate, sales tax must be collected.
Collecting certificates is never simple, even when a sale occurs in person. Once the transaction moves online, it becomes considerably more difficult. Most e-commerce platforms don’t offer an easy way to accept exemption and resale certificates. If they’re set up to collect sales tax, they may not allow tax-exempt sales — they’ll automatically apply sales tax to all transactions, even those that should be exempt.
Consequently, it’s not uncommon for manufacturers, suppliers, and other B2B sellers to simply charge sales tax at checkout then credit the buyer for the tax once they obtain a valid exemption or resale certificate.
This process is not ideal. For starters, it’s a public relations fiasco: Customers generally don’t appreciate being charged tax when they know they’re exempt. Unhappy customers strapped for cash, as many businesses are in the time of COVID-19, may dispute the charges or even cancel the sale. At a minimum, they’ll expect to be refunded the tax.
Yet tax can’t be refunded unless a valid certificate is on file. Thus begins the inevitable back-and-forth of communications, which adds to overall costs and can increase Days Sales Outstanding (DSO), the number of days it typically takes for a business to collect its account receivables or convert credit sales into cash. The longer the DSO, the more strain on the business.
How to validate exempt transactions online
Fortunately, it is possible to validate exempt e-commerce transactions with the right solution, which will enables a business to collect exemption certificates at checkout — whether the transaction occurs online, in store, or in the field. With certificates stored securely in the cloud, they can be easily located and accessed in the event of an audit or compliance question. The solution knows which certificate to use and how it should be filled out. It also tracks expiration dates and automatically sends renewal requests, ensuring certificates won’t expire and expose sellers to risk.
B2B ecommerce has gained a lot of traction in the past two years, and growth will only continue. Tax compliance on exempt sales is in many ways harder to manage than taxable sales. Businesses in largely exempt industries like manufacturing, distribution, and wholesale can benefit from getting a better understanding of how automation can help them achieve compliance.
Sales tax rates, rules, and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.