The Commonwealth of Massachusetts is squarely in the midst of modernizing its sales tax filing and remittance requirements, and in so doing, creating new, novel and likely challenging requirements for taxpayers. The most recent incarnation of this modernization was announced in its September 2021 DOR News, which hints at new requirements for restaurants and ecommerce sellers.
In April, Massachusetts began requiring large taxpayers effectuate what they refer to as an advance payment. In sum, tax revenue collected between the 1st and the 21st of the month is required to be remitted on the 25th of that same month. Shortly before the new requirement went into effect, Massachusetts granted a “safe harbor,” allowing taxpayers to avoid any penalty liability so long as tax remitted on the 25th was at least 80% of the total tax from the prior month. However, it’s worth reiterating that the official guidance published by Massachusetts specifies that this safe harbor only extends through calendar year 2021. After that, full compliance is expected.
If that weren’t disruptive enough on its own, the DOR News includes the following friendly “Heads Up:”
Sales tax filers will be asked to break down online sales versus in-store sales and meals tax filers will be asked to break down cash sales versus credit card sales. If not already keeping that information for your business, now’s a good time to start. It will be required next year.
The new requirement for meals tax filers is likely in direct response to the prevalence of sales tax suppression software, otherwise known as “zappers.” In short, a zapper is a piece of code installed on an electronic cash register or similar device for the sole purpose of deleting cash sales from their systems, meaning tax is collected at the time of sale but never reported or remitted. Zappers were first discovered in 1997 and have represented a tax compliance challenge globally since the early 2000’s. A few years back, my former colleague, Professor Richard Ainsworth, speculated that up to $20 billion in sales tax revenue may have been siphoned off by Zappers in the U.S. with more than $600 million of losses related to the restaurant industry alone.
Zapping the zappers?
Until now, most states have addressed the zapper challenge through a combination of legislation and cyber-sleuthing. Legislatively, at least 33 states have laws on the books that overtly prohibit the use of zappers. From there, states use technology experts to search for zappers where they suspect they may exist. This leaves open the question of how states begin suspecting that a seller may be using a zapper. Well, it’s difficult. If you completely delete a transaction out of existence, how do you know it ever took place?
In much of the rest of the world, the challenges imposed by tax fraud and the underground economy are addressed through electronic invoicing and real-time reporting requirements, obligating sellers to provide transaction-level information to government concurrent with the sale or soon thereafter. In countries where these systems are in place, tax fraud is much harder to perpetrate. Brazil, for example, has seen a $58 billion increase in revenue collection attributed to their robust real-time electronic invoicing requirements.
Massachusetts is likely looking to psychology as opposed to technology to move the needle. In 2020, John Lee, a fellow at the Hoops Institute of Taxation and Research Policy posited that a simple “behavioral nudge” could substantially reduce zapper-related fraud. Lee suggests that the mere act of requiring a seller to report cash transactions and credit transactions separately on a tax return will dissuade someone from intentionally under-counting their cash sales. If you are forced to clearly and unambiguously memorialize your fraud in writing (and sign your name to it) you are less likely to commit the fraud in the first place. Massachusetts appears to be banking on that indeed being the case.
Sovos will be tracking developments closely as Massachusetts provides additional guidance which we expect will, at a minimum, include significant adjustments to their existing sales and use tax returns.
It goes to show – in the world of modern tax, the savvy tax professional needs to expect the unexpected, and also be ready with a solution sooner rather than later.
Learn more about the changing sales and use tax laws and how they potentially impact your business by checking out our second annual Sovos Sales and Use Tax report.