Why Retailers Should be Funding Digital Transformation Projects with Tax Credits

The digital transformation strategies that many organizations in the retail industry have developed have been truly impressive. They show a real understanding of how changing customer attitudes, preferences and expectations impact just about every part of the business. And the projects and initiatives planned to implement these strategies aren’t just band-aid fixes – they are integrated, customer-centric solutions that retailers are using to create a real competitive advantage.

While there has always been a sense of urgency around digital transformation projects, the COVID-19 pandemic has accelerated the need to have these capabilities in place. Some retailers are looking for ways to help fund projects, especially those that might not be in the current year’s budget. Since these kinds of projects often have a large component that requires research and experimentation, claiming the federal research and development tax credit is one potential source of funding.

As a finance executive, it’s important to recognize retailers that might not be taking full advantage of this important government incentive. Let’s go over some interesting digital transformation projects we’ve seen organizations working on and the associated activities that might qualify for the tax credit.


An e-commerce system is often the foundation that many other systems depend on for information needed to automate business processes. A new e-commerce platform often replaces one or more legacy systems that might have caused business processes to be fragmented. One large retailer developed and implemented a custom, proprietary e-commerce solution. It replaced several legacy systems with a single platform, streamlining transactions for customers across mobile, web and in-store – it even does this across brands. Another retailer created its own custom point-of-sale (POS) system for stores that replaced a legacy Oracle system. The POS system included support for mobile devices and for unique kinds of transactions specific to this retailer.

Custom software solutions such as these often have many research and development activities that qualify for the tax credit, like:

  1. Conducting requirements analyses for the system,
  2. Designing the architecture of the system and database,
  3. Creating functional specifications,
  4. Programming and compiling the source code for the system,
  5. Integrating or creating interfaces among modules of the system, and
  6. Performing testing and debugging.



You can’t have omnichannel without having click-and-collect capabilities for customers to order online and pick up in a store. While this kind of functionality isn’t new, there are creative ways that retailers have extended click-and-collect to integrate it with other areas of the business.

For example:

  1. Including store distance and real-time inventory levels in click-and-collect functionality,
  2. Integrating suppliers to create a direct-fulfillment system where suppliers ship directly to customers, and
  3. Creating the capability to ship any product to any store within four hours of ordering.


These kinds of customizations often contain qualifying activities, not just for the software development but also for the knowledge that the software encapsulates. For example, algorithms that determine the best way to ship a product to a store for pickup or the best path for a delivery vehicle to take given current conditions might qualify for the tax credit. Developing the ability for suppliers to ship directly to customers likely consists of custom programming that involves new protocols to interface with external vendors and new security architectures to protect customer data.

Marketing and Smart Retail

We have a specialty retail client that couldn’t find any tools to help them do a better job of managing assortment inventory in stores. They developed a custom solution that considered demographics, location, purchase history and other factors to forecast demand and allocate assortments to stores. This is another example of a project with activities that include developing software and the intellectual capital that powers it.

Using customer data for machine learning and artificial intelligence to develop predictive models and recommendation engines is an area with many activities that might qualify for the R&D tax credit. For example, another retailer leveraged their customer data to build predictive algorithms that make customer-specific product offers in real time when a customer is online or in a store.


One retail client created a pilot store that uses camera-based monitoring to manage inventory and eliminate the need for cashiers or a customer checkout process. This kind of project calls for R&D. It’s an example of a solution that isn’t available for purchase yet and that requires a lot of experimentation to figure out how to make it work. It’s also an example of a project that  integrates software and hardware in a single solution.

Another client implemented robotics in their warehouse. While they didn’t create their own robotics system from scratch, the project required a lot of custom data analysis, experimentation and algorithm development to determine the best way to use robotics and make them work successfully in the retailer’s warehouse environment.

Customization vs. Configuration

It’s not a coincidence that these examples are primarily custom and proprietary solutions that organizations created rather than off-the-shelf solutions that organizations purchased and configured to meet their needs. Companies buy and configure packaged products because they don’t have the time and resources required to eliminate uncertainty and experiment to determine an approach. This provides speed to market but the time spent evaluating off the shelf products, and installing and configuring them to meet the company’s specific needs probably won’t qualify for the R&D credit. However, if custom development is required to address functional and performance gaps in the software, these activities may qualify.

Fund Research With the Tax Credit

The tax credit generated by retail digital transformation projects can be substantial since these projects are often large, enterprise-wide solutions that are chock full of innovation and experimentation activities. Using our proprietary process, we have successfully claimed and sustained large R&D credits in this space for several Fortune 500 companies. This goes to show that, as long as it’s done right, successfully claiming a large R&D credit can be done.

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