Taxpayers worried about complying with the new Massachusetts “Advance Payment” requirement, applicable to sales/use and room occupancy tax taking effect on April 1, 2021, should take note of a temporary safe harbor added to the final version of Technical Information Release TIR 21-4 published by the Department of Revenue on March 31, 2021.
As previously reported, the Massachusetts legislature enacted a first-of-its-kind advance payment requirement earlier this year. Under the new law, Massachusetts sales tax returns now become due on the 30 of the month but any taxpayer that had cumulative sales and use tax liability from 2020 exceeding $150,000 will need to make an advance payment on the 25 of the month for tax collected from the 1 to the 21. While pre-payment/prompt payment of sales tax are common across the country, the Massachusetts rule is unique because it does not envision a process through which current liability may be safely estimated based on past liability. At least not until now.
When the Massachusetts DOR published the draft version of TIR 21-4, the only protection from the 5% under payment penalty for insufficient advance payments was a rule specifying that no penalty would be imposed if the remittance on the 25 turned out to be 70% or more of the total tax or excise due for the month. However, the final published version provides an additional safety net. Specifically, the DOR states that so long as the advance payment made on the 25 equals 80% of the total sales tax liability from the prior month, the 5% penalty would be automatically waived. The DOR provides the following example to illustrate the new safe harbor:
Super Toys Inc. is subject to the advance payment requirement because it had more than $150,000 in cumulative sales tax liability in 2020. In March 2021 Super Toys Inc.’s total tax due was $20,313. Based on that knowledge, Super Toys Inc. makes a payment of $16,250 on April 25, 2021 ($20,313 x 0.8 = $16,250). Super Toys Inc. must file its return for the April 2021 filing period on or before May 30, 2021. Super Toys Inc. determines that it has $500,000 in total gross receipts from taxable sales for the April filing period, of which $325,000 were from taxable sales made from April 1 through April 21. Super Toys Inc. paid only $16,250 on April 25, 2021, so it remitted less than the amount required to be remitted ($325,000 x 0.0625=$20,313), resulting in an underpayment of $4,063. Based on its total taxable sales for the April filing period, Super Toys Inc.’s total sales tax due is $31,250 ($500,000 x 0.0625). Super Toys Inc. must remit the remaining tax due of $15,000, the difference between what was remitted on April 25 and the total tax due for the filing period, with the return it files on or before May 30, 2021. Super Toys Inc. remitted less than 70% of the total tax due for the month on April 25 ($31,250 x 0.7 = $21,857) but because on that date it remitted at least 80% of the total tax due for the prior month ($20,313 x 0.8 = $16,250), there is a reasonable cause waiver of the 5% penalty for the April 2021 filing period.
As shown in the above example, any under-remitted advance payment must be made up in the payment made with the tax return on the 30 of next month.
It’s important to understand that this reprieve is short lived. The publication is clear that this safe harbor expires after the tax period ending December 30, 2021. Nonetheless, we will be watching Massachusetts closely as it is likely to issue a regulation in the next few months, which could include additional wrinkles.
The evolution of the Massachusetts advance payment requirement embodies all the hallmarks of what it takes to stay compliant in the world of modern tax. New and challenging requirements are the norm rather than an exception. These requirements will be tweaked and adjusted right up until the day they become effective, and a strategic approach to compliance is the only way to stay ahead of the game.