Major changes ahead for sales tax compliance

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The future of sales tax compliance is digital, and governments are playing a major role in driving the change, Avalara CEO Scott McFarlane is warning companies and their tax advisors.

Speaking at Crush 2017, the sales and use tax compliance solution provider’s second annual user conference, in Austin, Texas, this week, McFarlane told attendees that, “The importance of technology in tax is going to change tremendously” in the near future, as taxing jurisdictions aim to boost overall compliance – and their collection rates.

“Governments are going digital” in their approach to sales and other indirect taxes, he said. “What they’re saying is, we want to be part of the transaction when it happens.”

As a leading example, he cited Brazil, where the government has a program that links its tax collectors directly into companies’ accounting systems to allow for real-time reporting and collection of sales taxes. “When you do a purchase, you essentially have to get permission from the government, and they’re going to keep a record of it, and they’re going to check you if you don’t file a tax return,” he explained.

Other technology-based programs are bringing similar change to Europe, he noted, and governments around the world are also looking at new systems and new approaches. “Seventeen countries, including China and India, are going to change their tax regimes entirely,” he said. “This is a ten-year trend. Things are changing around the world because of technology.”

It can happen here

Many American businesses will be exposed to these changes through their international transactions, and while opinions are divided over whether those kind of government-led programs will be accepted here soon, that doesn’t mean that the future in the U.S. won’t be both more complex and more digital, according to McFarlane.

“We’re saying, ‘This can never happen in the U.S.,’ but sales tax here is getting more difficult,” McFarlane said. “Look at Colorado – they’re starting to say they’re going to start enforce use tax rules.”

“It’s a step along the path of digitizing the process. It’s a train that’s coming down the track,” he warned, noting that not too many years ago, only five states allowed e-filing of sales tax returns, while now a quarter of them require it.

And even if U.S. states don’t directly insert themselves into companies’ books and processes, that doesn’t mean that they’re not seriously interested in compliance. “A third of all audits are on out-of-state businesses,” McFarlane added. “States are all keen on finding new revenue. It’s not new, but it’s happening to businesses you wouldn’t expect it to.”

In the end, technology will have to play a role because of the complexity of complying with sales tax rules from up to 14,000 different taxing jurisdictions. “Sales tax is damn hard. It’s harder than most people think,” McFarlane said. “Nearly half of all CFOs say that, under audit, they wouldn’t get sales tax right.”

And it’s only natural for these to be major issues in the U.S., he added: “Our country was founded on a sales tax dispute!”

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