Massachusetts Eases Up on its Advance Payment Requirement

In a surprise move, the Massachusetts legislature swiftly adopted a new law easing the sales and use tax compliance burden of their new “Advance Payment” requirement that was imposed on certain large taxpayers beginning last April.

As initially reported in December 2020 and then again in March 2021, Massachusetts created a set of unique filing requirements, which it refers to as “Advance Payment.” Under these new rules, any taxpayer whose cumulative Massachusetts sales and use tax liability exceeded $150,000 in the immediately preceding year is now required to make a sales tax payment on the 25th of the month equal to actual tax collected between the 1st and 21st of that same month. The Advance Payment need not be accompanied by a tax return. While there are no shortage of states requiring sales tax “prepayments” from certain taxpayers, the Massachusetts requirement to compute and remit actual tax collected is far more challenging and disruptive to existing compliance processes. 

However, just before the new requirement was slated to take effect, the Massachusetts Department of Revenue (DOR) granted taxpayers a short partial reprieve. When the DOR published the final version of Technical Information Release (TIR) 21-4 detailing the mechanics of the new rule, it added what could best be characterized as a temporary “safe harbor.” Specifically, so long as an obligated taxpayer remitted a payment on the 25th of the month equal to 80% of the tax collected in the prior month, the state would automatically waive the 5% penalty for underpayment of taxes. But the TIR was clear that safe harbor would only extend for the remainder of calendar year 2021. Starting in 2022, taxpayers would be responsible for knowing exactly how much tax they collected between the 1st and the 21st and remitting precisely that amount to the DOR.

As the calendar turned to December and the safe harbor was set to expire, the Massachusetts legislature introduced a wide-ranging COVID recovery bill (HB 4269), which was passed and signed by both chambers in 11 short days. Contained therein was provision that materially altered the new Advance Payment requirement in a way that provides taxpayers considerable relief. Rather than simply extending the Safe Harbor, the legislature decided that large taxpayers who met the threshold requirement had two choices when complying with the Advance Payment. They could either:

1. Remit the actual tax collected between the 1st and the 21st of the month on the 25th, OR
2. Remit not less than 80% of the tax collected during the immediately preceding filing period.

Essentially, Massachusetts made it an entirely legitimate option to base the Advance Payment on 80% of the remittance in the previous month. While somewhat different from extending the safe harbor, the practical effect of this new provision is substantially the same – taxpayers will not be penalized for underpayment so long as their Advance Payment meets the 80% threshold.

This change is undoubtedly welcome by many of the organizations required to make Advance Payments in Massachusetts, who were otherwise facing January filings with no Safe Harbor protection. However, not everyone will be completely enthralled with the new option. Many taxpayers would argue that a better measure of the Advance Payment would have been 80% of the tax remitted in that same month for the prior year. This is particularly true for companies that have significant seasonal fluctuations in sales volume. Imagine a national retailer who experiences a sales spike in the month of December followed by a precipitous drop in January. Nonetheless, when making their January Advance Payment under the second option it will be based on 80% of the tax collected during their December spike. While any overpayment will be credited towards the liability due at the end of the month, no taxpayer is excited about sending more money to the DOR than is absolutely needed. While nothing prevents a particular company from switching between the two options, the fact remains remitting based on actual collections in the way envisioned by Massachusetts is an enormous challenge.