When Massachusetts Governor Charlie Baker issued his Fiscal Year 2021 budget proposal in late January, he proposed several ideas purporting to modernize Massachusetts sales tax by recognizing the growing importance of technology and computing power in tax compliance. The ideas are interesting to say the least.
Idea #1 – Shorter Time from Collection to Remittance
For many taxpayers in Massachusetts, sales tax filing and remittance happens on a monthly basis, meaning that on the 20th of the month, sellers will report and remit any tax collected in the previous month. As accurately described by Governor Baker, under this system tax may not be remitted until 50 days after a sale has occurred. The proposed change would require large sellers ($100,000 or more in sales tax remitted during the previous year) to file their taxes during the last week of the calendar month. That filing would include all taxes collected in the immediately previous 4 weeks. Tax collected in the last week of the month would be reported in the following month.
States have long used pre-payments or accelerated payments to achieve a similar objective, requiring states to effectively pay a “deposit” on projected future tax collections. Massachusetts does not currently have a pre-payment requirement in their law but believes that traditional monthly filing as exists today as an “antiquated process [that] was established decades ago during the time of manual cash registers, handwritten checks, and mechanical adding machines.”
Idea #2 – Real Time Remittance
Beginning in 2023, retailers (through their Payment Processors) would be required to remit sales tax daily as sales are made. Real Time or Near Real Time tax remittance has been considered by Massachusetts in previous years and has also surfaced as an idea in other states as well, but to date no jurisdiction has a concrete requirement in place. We understand that a handful of companies claim to have the technology in place that would enable successful same day payments.
Allowing states to work directly with Payment Processors to enable efficient and timely tax collection has some initial appeal. In some ways, it looks a little like the Marketplace Facilitator requirements that are sweeping the country. But Marketplace Facilitators and Payment Processors are very different types of companies. Today, Payment Processors don’t necessarily know what their clients are selling, where the item is being delivered (it might not same address as what’s on file at the credit card company), and what portion (if any) of the total charge represents tax. It’s also an open question as to whether states are properly equipped with the technology to receive payments in real time; which leaves open the question of whether the cost of enabling real-time payments will meet or exceed the expected financial benefit.
Idea #3 – Anti-Zapper Rules
For years, retailers with significant cash sales have found themselves vulnerable to tax zappers. A zapper is a piece of software that is downloaded to a POS system and makes some transactions “disappear” after the cash is taken but before the sale is recorded and the tax reported. Zappers have been around for years and the Governor’s proposal would impose civil penalties on the people and entities that sell or install zappers on POS terminals.
Governor Baker’s basic premise is unquestionably right. Tax is quickly going digital and states should recognize the impact modern technology has on tax – both with respect to how tax laws are enforced and how companies comply. Years ago, it would have been entirely unreasonable to ask a taxpayer to submit a tax return within a few short days of the transaction being consummated. In fact, it will still be a challenge for taxpayers without a comprehensive automated solution in place. Bigger questions surround real time payments and payment processor liability. The idea is novel but much needs to be learned before the requirements are set in stone.
First in Latin America and now in Europe and Asia, the concept of Continuous Transaction Controls (CTC’s) is gaining momentum. The theory behind this concept is that if governments have real-time (or near-real-time information) about what is being bought and sold in their country, they are well poised to ensure every penny of tax due is efficiently collected. Interestingly, while CTC’s focus on information, the Massachusetts proposal focuses on the timing of payments. It leaves wide open the question of efficient and accurate enforcement. Whether this approach takes hold in the Commonwealth of the rest of the United States remains to be seen. In any event, it strikes me that US state sales tax administrators, would do well to take a moment to understand what the rest of the world is doing so they can optimally prepare for the digitization of tax .