States want real-time sales tax remittance, but what will it take to get there?
Massachusetts Governor Charlie Baker recently released the 2021 budget proposal for the state, which includes a plan that will require businesses to remit sales tax from digital transactions on a daily basis.
The two-phase plan will apply to electronically remitted sales and use tax, local option meals tax and room occupancy tax, and is slated to go into effect on July 1, 2023. While there has been successful enforcement of real-time remittance in other countries, like Austria, Italy and Poland, the reality of implementing daily returns in the U.S. is contingent on a range of factors, stretching from technology to channels of communication.
How Massachusetts plans to modernize sales tax
The first phase of the plan will require large businesses to remit the sales tax collected during the first three weeks of the month in the fourth week, rather than by the 20th of the following month. This would apply to vendors whose overall liability in the previous 12 months is more than $100,000. Phase two will require all retailers and third-party payment processors, like credit card companies, to remit tax from electronic transactions on a daily basis.
Under the plan, payment processors will file monthly reports with each seller, identifying the tax owed to the state on each sale. In addition, payment processors would file monthly reports with the state’s Department of Revenue, identifying the payments that were made to each seller during the month and the amount of tax paid to the state on the business’s behalf.
What needs to happen to make real-time sales tax a reality?
The proposal by Massachusetts isn’t a first in the U.S. In fact, this is the third time the state has pushed for faster sales tax remittance since 2015, and similar proposals have been seen in Connecticut, Nebraska, New York and Puerto Rico. While we can expect that many states will be watching closely to see how Massachusetts’ efforts go, there are a host of challenges that must be overcome before real-time remittance becomes a reality in the U.S.
Some of the key challenges include communication gaps, resource constraints and inadequate technology. More specifically:
Communication gaps between businesses and payment processors
Under the rules laid out in the proposal, payment processors will be required to remit sales tax on behalf of the sellers. However, in order to do so effectively, payment processors will need to know how much of each sale is tax, and that information must come directly from the seller. As it stands today, very few sellers supply the breakdown of their electronic sales to payment processors.
While the breakdown of electronic sales data is most likely available for most businesses, digesting and transmitting the data to payment processors will take time, money and technological resources. Without reliable sales information from sellers, it would be nearly impossible for payment processors to remit the correct amount of tax, and even harder for a state to enforce the liability on the payment processor.
Resource constraints among businesses
The success of this proposal assumes that every business that meets the state-specified threshold has the resources available to take a process that currently happens once a month and execute it every day. In nearly every state, the payment date for returns is the 20th of each month, primarily because businesses need that amount of time to close their books. Additionally, many businesses are unaware of how much tax they have collected until they close their books on a monthly basis.
The fluidity of sales is another factor that will have to be taken into consideration. For example, if a buyer makes a purchase on Tuesday and returns it the next Monday, the seller is required to return the sales tax on that purchase. As it stands, businesses often have the ability to handle the return of sales tax charged for returns because the transactions generally happen within the same month and they can make the adjustments before they remit the tax to the state. In addition, businesses will also remain responsible for the filing and accuracy of sales tax on check and cash sales. For many businesses, complying with real-time remittances would mean that they would have to completely overhaul their reporting processes and technology, costing them time and money.
Technological shortcomings across state revenue agencies
Not only will businesses have to grapple with the expense and difficulty of preparing their systems for real-time remittance, so will state revenue agencies. For state agencies to be able to accept daily remittances from thousands of sources and assign each remittance to the appropriate account, they will be forced to invest heavily in technology and personnel resources to keep pace with the added demand. Further, at the end of the month, the tax agency must be able to accept a return from a retailer and match the sales information on the return with remittances from multiple sources.
After states and businesses overcome all of these challenges, there is still no improvement to the accuracy of the tax calculation, only a faster time to remittance. In order for real-time sales tax remittance to become viable in the U.S., governments will need to provide an ample amount of guidance to businesses and payment processors to ensure they have a clear understanding of new requirements. States will also need to work with the private sector to assist businesses that lack the resources to adhere to and manage real-time compliance. At the end of the day, perhaps the most daunting challenge facing both parties is having the technology in place to handle the more frequent demand for remittance, which is something that states and businesses will need to agree on to make this type of regulation work.