Thinking about a Post Pandemic Sales Tax Enforcement Landscape

Charles Maniace
April 20, 2020

For those tax professionals responsible for keeping their company safe from audit risk, the time is coming (if it’s not already here) to think about how states may act to shore up budget shortfalls stemming from decrease in sales tax revenue  as a result of the COVID-19 pandemic.

While the US economy was (until recently) chugging along strongly for many, several states were experiencing significant budget challenges and it’s likely the budget impact of the pandemic won’t be fully understood for several months. While the immediate impact of increasing unemployment benefit claims across the country is readily quantified, here in the US, we rely heavily on periodic (often monthly, sometimes quarterly or annually) business tax filings and payments. It’s no secret that projections made even just a few months ago will not be realized, but the actual tax revenue decrease is anybody’s guess.

Many US states have followed the federal government in deferring the deadline to pay income tax and have also offered businesses deferral options related to sales tax filing and remittances, extending through June. These deferrals often involving payment plans that could extend revenue collections out even further. Until those returns are filed, the full extent of the revenue shortfall will remain a mystery.

It’s worth it to take a moment to understand how this might compare to countries in Latin America and Europe who have either deployed or are contemplating continuous transaction controls. Countries where electronic invoices are sent to tax authorities in real (or near-real time) likely already have some understanding of the financial impact of COVID, even if they have offered significant deferrals of their periodic filing (VAT return) requirements.

While billions in federal stimulus money has been allocated to states under the CARES Act, these funds can only be spent meeting necessary expenditures related to COVID-19 that will be incurred from March 1 to December 30, 2020. The money cannot be used for any item addressed in the most recently approved state or local budget.

States are, of course, already speculating that the impact will be massive. California, who has spent the better part of the last few years amassing a $21B rainy-day fund, expects to run through their surplus quickly. Meanwhile, Rhode Island public officials are speculating that they are mere weeks away from running out of cash. With many stores closed and personal consumption at a virtual standstill, states like Florida which rely predominantly on sales tax revenue to fund their budget are likely to struggle.

While billions in federal stimulus money are being allocated to the states under the CARES Act, these funds can only be spent meeting necessary expenditures doe to COVID-19 incurred between March 1 and December 30, 2020 and cannot be used for any item addressed in the most recently approved budget.

In an earlier blog, we reported on the efforts of hero-manufacturers to meet our growing need for certain essential items such as ventilators, masks, sanitizers, gloves and face shields. What we said then remains true that the most important objective for companies stepping outside their normal product offerings is delivering these items to where they are critically needed. But, when you consider the possibility of significantly increased tax enforcement in a post-pandemic world to close what will be likely enormous budget gaps, the time is now for companies to start thinking getting your compliance house in order. Below is a checklist of some critical items.

  • Evaluate your nexus profile. If your company is offering a telecommuting option, think about whether remote employees have created expanded physical nexus
  • Likewise, if you have opened or expanded e-commerce channels, monitor your sales volume to see if you have passed any economic nexus thresholds
  • If your compliance function is temporarily understaffed, monitor where you may defer filing and payment obligations without facing penalty or interest assessments
  • Understand the taxability of what you sell – medical supplies, protective clothing, and sometimes even toilet paper, may be tax-exempt
  • Understand your customers – if selling to hospitals, nursing homes, governments, or non-profits, maintain and keep any necessary exemption certificates

We are in unprecedented times. Never have we seen a strong economy purposely brought to a screeching halt. States had been counting on previously projected revenue to fund critical projects such as infrastructure, school construction and social programs. When all is said and done, we can count on the fact that they will be moving aggressively to recoup at least some of those losses through compliance enforcement. The question is, will you be ready when they do?

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Author

Charles Maniace

Charles Maniace is Vice President – Regulatory Analysis & Design at Sovos, a leading global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, Chuck leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos customers continually compliant. Over his 15 year career in tax and regulatory automation, he has provided analysis to the Wall Street Journal, NBC and more.
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