As previously reported by my colleague, Erik Wallin, the Massachusetts Department of Revenue is set to start enforcing a new advance payment program applicable to sales, use and room occupancy tax.
The requirements are detailed in a draft Technical Information Release and in an email sent to taxpayers on March 5. There are two critical changes to sales tax compliance obligations that all Massachusetts taxpayers must consider:
- Effective for tax periods beginning on April 1, 2021, monthly sales/use tax returns become due on the 30th of the following month. This change applies to all taxpayers.
- Any taxpayer whose cumulative Massachusetts sales and use tax liability in the immediately preceding calendar year (January to December 2020) exceeded $150,000 will need to make an “advance” sales tax payment due on the 25th of the month based on actual tax collected starting the 1st of the month and ending on the 21st.
Unlike most other states with more traditional pre-payment requirements, the clear intent behind the Massachusetts requirement is that taxpayers determine their actual tax liability from the first three weeks and remit the advance payment amount, without filing a tax return, on the 25th. Failing to make a sufficient advance payment will result in a 5% penalty based on the amount underpaid. Massachusetts will waive any penalty if the amount remitted on the 25th is equal to 70% or more of the total tax due for that month. Any tax collected after the 21st of the month is remitted along with the standard monthly tax return, now due at the end of the following month.
For taxpayers subject to this new requirement, this is how filing and remittance will look for April and May.
- April 20 – March 2021 Tax Return due. Remittance due for tax collected between March 1-31
- April 25 – Advanced Payment due for Tax Collected from April 1-21
- May 25 – Advanced Payment due for Tax Collected from May 1-21
- May 30 – April 2021 Tax Return due. Remittance due for tax collected between April 22-30
While the Commonwealth is still finalizing the Technical Information Release and will likely issue regulations, the immediacy of the first deadline requires action. First, all taxpayers should evaluate whether they are subject to the new advance payment requirement based on their 2020 tax remittances. Taxpayers required to make advance payments should further consider what they need to do to determine taxable sales effectuated between the 1st and the 21st of the month and how they might be ready to make a tax payment on the 25th.
The Massachusetts system does not overtly contemplate estimating tax liability. Nonetheless, it seems possible, if not likely, that some sellers may need to embed certain estimates and assumptions into their process. In so doing, it is important to understand that even the most reasonable estimation process will likely not be considered “good cause” to avoid an underpayment penalty.
Now, it’s unclear whether the Massachusetts advance payment program sits on the leading edge of a new trend in “real time” tax compliance or whether it might end up being a challenging outlier. Regardless, it’s clear that sales tax compliance is becoming more and more complex by the day and companies need to be ready for whatever might lie ahead.
