As ecommerce continues to grow, various states are introducing – or planning to introduce – Retail Delivery Fees (RDFs). U.S. ecommerce sales reached an impressive $1.1 trillion in 2023, accounting for 22% of total retail sales, with projections suggesting an increase to $1.9 trillion by 2029. This growth is driven by technological advancements and evolving consumer preferences alongside the emergence of new competitors responding to changing market dynamics.
Today, shoppers can easily browse and purchase products through various platforms, including computers, smartphones and social media. Apart from digital products, these items must ultimately be delivered to the purchaser, and deliveries rely on the continued viability of our transportation infrastructure. Therein lies the challenge.
With the rising volume of deliveries, ecommerce suppliers depend mightily on the availability of our roads, bridges and highways. This is especially true given the need to meet the consumer expectation of near-immediate deliveries. However, this infrastructure needs to be constantly maintained and improved. A key source of transportation infrastructure funding has always been fuel taxes, but with fuel taxes on the decline due to the proliferation of electric vehicles and the increased fuel efficiency of traditional gasoline engines, it’s not surprising that states have identified a charge on retail deliveries as a new source of funding. However, these fees also introduce significant compliance challenges for retailers.
Understanding Retail Delivery Fees
RDFs are assessments imposed on the delivery of goods bought online. States like Colorado and Minnesota have already adopted RDFs, each with unique requirements. Supporting the implementation of a new RDF can represent a significant technical challenge for sellers, particularly as states establish their own distinct fee rules and requirements. These variations create hurdles, requiring retailers to adapt to each state’s specific regulations, complicating pricing and compliance efforts.
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Don’t think for a moment that the trend will stop with Colorado and Minnesota. Other states like Nebraska and New York, have proposed legislation related to RDFs, while Washington State completed a study examining the feasibility of a statewide RDF. No surprise, they believe an RDF would be easy to implement and would generate considerable revenue.
Depending on how this trend plays out, sellers could face what amounts to a new nationwide compliance requirement that relates to sales tax but in many ways is separate and distinct. In any circumstance, RDFs only add to a retailer’s existing compliance challenges.
Compliance Challenges for Retailers
Even with only two RDFs on the books, the complexity of state-specific variations is beginning to play out. At the simplest level, the fee amount varies between the two states. In Colorado, it’s $0.29 per order, while in Minnesota it’s $0.50. Things only get more complicated from there. In both states, the fee applies to any invoice that contains a taxable item. In Colorado, that rule is absolute. In Minnesota, it’s not, as the fee also applies to clothing, which is exempt under state law, but does not apply to diapers, even though diapers are classified as exempt clothing for sales tax purposes.
Under the U.S. Constitution, states are obliged to ensure that their tax requirements are neither discriminatory nor unduly burdensome to out-of-state retailers. However, to date, states have not viewed these obligations as a barrier to imposing RDFs. This places the challenge squarely on retailers to remain vigilant and adaptable to avoid penalties and the operational disruptions that often follow new compliance requirements.
Strategies for Enhancing Compliance
To effectively manage the rise of RDFs and whatever new and challenging requirements may be on the way, retailers need to adapt their compliance strategies. Here are four key approaches to enhance compliance efforts:
- Stay informed about legislative changes: Retailers should keep a close eye on state-level tax changes and understand how new requirements, like RDFs, could impact their compliance. Staying informed allows businesses to adjust their practices and stay one step ahead.
- Invest in tax automation: Implementing tax automation can simplify compliance for retailers navigating the challenges of sales tax RDFs, point-of-sale fees and everything else. Automating tax calculations and reporting reduces errors and ensures timely and accurate remittance, ultimately saving time and resources that are better directed at growing your business.
- Collaborate with tax professionals: Engaging with a community of experts who understand how compliance challenges are effectively solutioned can provide retailers with valuable insights and strategies.
- Conduct regular compliance reviews: Regular compliance checks are essential for evaluating the effectiveness of existing strategies amidst changing requirements. By reviewing processes, retailers can identify gaps and ensure their compliance measures are sufficiently robust and effective, eliminating any unpleasant surprises during an audit.
Make Your Voice Heard
Governments have no choice. Sales tax must evolve alongside technological advancements and societal changes. What may have been a robust and viable source of government funding based on consumer preferences as they existed yesterday may represent a dry well today.
However, a well informed and mindful ecommerce retailer can make their voice heard. They can consistently advocate for simpler and more uniform approaches to tax compliance. They can push for policies that allow states to continue collecting ample tax revenue while allowing retailers to thrive without being overwhelmed by regulatory complexities.
Ultimately, as the ecommerce landscape continues to evolve, effective communication and collaboration between lawmakers and the business community will be vital in creating a tax system that benefits all stakeholders, ensuring fairness and compliance without stifling growth.
Final Thoughts
RDFs mark the latest shift in how states generate revenue from ecommerce’s rapid growth. The challenges linked to these fees pose considerable obstacles for retailers striving to maintain compliance. While lawmakers should be mindful of the administrative burdens placed on retailers when introducing new requirements, ecommerce sellers cannot depend on the wisdom and discretion of legislators or regulators. Rather, they must be prepared for whatever comes next, whether that be a new wrinkle to the RDF, new special taxing districts in Nebraska, disruptive changes to longstanding existing rules in Illinois, sweeping new federal rules governing the taxation of ecommerce, or something not even yet imagined.
As VP, Regulatory Analysis and Design at Sovos, Charles Maniace lives and breathes tax. For him, job No. 1 is ensuring Sovos customers remain fully compliant as rates, rules and requirements change around them. When he signed up to become an indirect tax expert nearly 20 years ago, he had no preconceived notions about his work garnering significant public attention. Today, Maniace is a respected industry voice routinely appearing in publications such as the Wall Street Journal, Forbes and Bloomberg. He has been listed among Accounting Today’s Top 100 Most Influential people for four years. Being an avid traveler and craft beer enthusiast, he enjoys nothing more than visiting Sovos offices around the world and sampling the local brewery offerings.
