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?

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.


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.
Share This Post

LATAM VAT & Fiscal Reporting
May 20, 2020
Sovos Acquires Taxweb, Extends Tax Determination Capabilities in World’s Most Challenging Compliance Landscape

Earlier this month Sovos announced its second acquisition of 2020, completing our solution for Brazil with an unparalleled offering that solves tax compliance in the place where it is most challenging to do so.  Too many companies doing business in Brazil have been burdened by managing multiple point solutions for continuous transaction controls (CTCs), tax […]

August 11, 2020
10 Steps to Expand Your Winery

Looking to enter a new market or bring new wines to the marketplace? Growing any business can be complicated, and the beverage alcohol industry is no exception. Not knowing how or where to begin can be the biggest hurdle. From market research and branding to strategic considerations and compliance, this 10-step guide will get you […]

August 10, 2020
Ask Alex: Your Bev Alc Compliance Questions Answered (August 2020)

Do you have questions about the rules, regulations, and compliance requirements of the beverage alcohol industry? This series, Ask Alex, is a perfect opportunity to get those pressing questions answered straight from one of the industry’s regulation and market experts, Alex Koral, Senior Regulation Counsel, Sovos ShipCompliant.  To take advantage of this opportunity and get […]

Tax Compliance
August 7, 2020
GAO Urges IRS to Overhaul 1099 Reporting for the Gig

A couple of weeks ago, the Government Accountability Office (GAO) released a report to the Senate Finance Committee describing the issues the IRS faces in enforcing income tax compliance for gig economy workers. The report highlighted long-standing issues the government has been grappling with in receiving tax information necessary to enforce compliance along with specific […]

EMEA VAT & Fiscal Reporting
August 4, 2020
New VAT Rules for Online Marketplaces and Imports of Goods into the UK

The United Kingdom’s HMRC has issued new guidance on the VAT treatment of cross-border sales of goods and online marketplaces beginning 1 January 2021, following the end of the transition period. Cross-Border Sales under £135 New rules will apply when a business sells goods for £135 or less to a UK customer and the goods […]

EMEA VAT & Fiscal Reporting
August 3, 2020
New EU Tax Package: VAT Priorities

On 15 July 2020, the European Commission (EC) adopted a new Tax Package, intended to increase tax compliance while reducing administrative burden on businesses. The Tax Package contains a number of proposals related to VAT, of which three in particular stand out: A single EU VAT registration for taxpayers; Modernized VAT reporting obligations; and Facilitated […]