Supply chain disruptions create ‘nightmare before Christmas’ for retailers

For small retailers, the holiday shopping season typically delivers flurries of frantic customers, registers full of revenue, and unfortunately, a few “lumps of coal” thrown into the mix: Maybe there’s an unexpected shipping delay on a hot selling item; maybe most of the staff gets hit with the flu in the same week; or perhaps a snowstorm knocks out the electricity.

Undoubtedly, the holidays are usually a sleigh full of both cheer and chaos for retailers any given year. But the 2021 season may be a bit heavy on the latter. Factors such as clogged shipping ports, worker shortages, and skyrocketing costs are knotting up the supply chain and creating a nightmare of chaos — and sales tax complications.

Plugged-up ports

Ports on both coasts, particularly Los Angeles — which hosts 40% of incoming U.S. cargo — and New York have reported record backlogs. The CEO of shipping logistics company C.H. Robinson stated that he’s witnessing a never-before-seen move on the part of major retailers: They’re chartering entire container ships and planes to bring in products from overseas. But what will smaller retailers do that can’t afford to “rent” a ship?

Truck driver deficit

When merchandise finally does make landfall, a shortage of shipping trucks might put another kink in the supply chain. The trucking industry is hurting for drivers. A New York food supplier explained that they’ve had to hire drivers from Alabama and put them up at hotels in the Bronx. Though the pandemic can claim some responsibility for the driver drought, the industry saw a deficit back in 2018 due to a booming economy when the demand for goods hit a high.

Rising rates

In anticipation of these delays, warnings have been sounded for shoppers to get their gifts early this year. And in response to that alert, the U.S. Postal Service is bumping up rates and slowing down first-class mail deliveries as of October 1 to accommodate anticipated shipping volume increases.

Postal rates aren’t the only charges surging upward. Inflation in the U.S. and workforce shortages across the globe have pushed up price tags across supply chains. 

Small and susceptible

Retailers of all sizes may very well endure the effects of the above factors. But smaller retailers may feel this “nightmare before Christmas” a little deeper than the big guys. For large merchants, a delayed shipment of tricycles probably won’t sink their revenue or customer retention. But extreme delays and rising costs for a small retailer can be devastating. They must do what they can to meet customer demand with as little disruption and at the most reasonable expense as possible.

Moving to meet demands

One tactic to meet customer demands may be to switch suppliers or move inventory — voluntarily or unknowingly. Marketplace vendors can find that Amazon sometimes shifts stock to different warehouses or pulls merchandise from closer locations to fulfill orders. For example, say you’re storing Santa hats in a North Carolina fulfillment center. Someone from Washington state orders one from you, but Amazon has some of those hats in a warehouse in that state. The retailer might pull from the Washington inventory for speedier shipping.

Great. The item gets to your customer quicker.

But that can churn up tax complications for you via economic nexus. Nexus is the relationship between your business and a tax jurisdiction that triggers a sales tax collection and remittance obligation. Initially, this was based on a physical presence within a given state. However, since 2018, a U.S. Supreme Court ruling enabled states to tax remote sales that exceed a certain monetary threshold. So, if you sell products into 33 states and surpass all thresholds, you’re liable for sales tax in each of those states if they enforce economic nexus. Tax obligations get even trickier with product inventory.

Many states consider product storage as a nexus-creating activity but vary significantly in how they classify inventory: “stocks of merchandise,” “stock of goods,” “supplies,” etc. Some states are specific in their definition and parameters as to what establishes nexus, including calling out Fulfillment by Amazon (FBA) merchants; others are vaguer and simply cite that storing property for sale qualifies.

So now, when you pick up another supplier or Amazon relocates your product, you may be liable for sales tax in the new hosting state. And because states can diverge so greatly in their minutia of regulations and requirements, you may find yourself with a whole fresh bag of tax obligations.

From nexus nightmare to cheerful tax tidings

There’s not much you can do about shipping delays, labor shortages, and other supply chain disruptions. But if you remain proactive and get creative, you can still get through the holiday season with fewer lumps of coal and more tidings of good cheer. Part of your tactical efforts should include knowing where your products are and the tax obligations of those locations.

And if you want to lighten your load, consider leaning on sales tax experts.