States Could Improve Business Tax Compliance by Sharing More Data

Sharing of information on business taxes by state tax authorities could improve business tax compliance, according to a new study.

The research, from LexisNexis Risk Solutions and the Governing Institute, surveyed tax and revenue officials across 29 states and found 85 percent believe business tax non-compliance is a key concern in their states. While many of the states are already using internal and external data sources to combat noncompliance, less than half the respondents said they were satisfied with their current external tools and feel better tools are needed.

Officials said noncompliance is sometimes unintentional and sometimes intentional. Many businesses are unaware of tax requirements or are confused by complicated tax codes that change frequently. But intentional tax evasion is a contributing factor, according to a majority of state officials. A common lament in states where fraud is a major issue is that it is simply hard to prove and easy to get away with.

“Tax noncompliance impacts everyone,” said Haywood Talcove, CEO of the government unit at LexisNexis Risk Solutions, in a statement. “Business owners can inadvertently find themselves in violation, leaving their companies liable to penalties and even dissolution. Noncompliance can also shift a greater share of the tax burden to honest taxpayers. Whether it’s unfamiliarity of tax code requirements, misreporting or fraud, states want and need to do a better job in closing the tax gaps by accessing more data and leveraging new technologies.”

Some types of taxes seem to cause more problems than others. Respondents said sales and use, withholdings and corporate taxes are the most problematic, while excise taxes, environmental taxes and mining/fishing/gaming taxes are largely trouble-free.

State tax authorities want more data that can be linked to show a more complete picture of a business. They said multi-state data sharing and greater access to federal payroll information could help them address the problem. But state-to-state differences and regulatory barriers to data sharing—either real or perceived—are key challenges that must be overcome.

Many states have joined multi-state data sharing consortiums like the Multi-State Tax Commission, or have formed data-sharing partnerships. But these sources do not fully meet the needs of revenue and tax agencies. Less than half of respondents expressed any satisfaction with their current external tools. They said more data and better analytics tools are needed to improve tax compliance.

"Officials said additional, diverse data would provide a more complete view of a business,” said Steve Lappenbusch, a market planner in the tax and revenue unit at LexisNexis Risk Solutions. “Accessing business activities across state lines, integrating states' data warehouses, and accessing federal payroll information would help enormously. Using modern analytics tools to visualize the data can show agencies where problems are most likely to arise, allowing them to more effectively target resources."

Other information "wish list" items included access to business organizational charts, lease agreements, utility bills, property ownership documents, and Social Security and federal employer ID number information.

By commissioning the study, LexisNexis Risk Solutions wanted to gauge agencies' attitudes on what future challenges loom for business tax noncompliance. A key concern is figuring out how to equitably tax businesses participating in the "sharing economy," which includes such businesses as ride sharing, home lodging and peer-to-peer lending.

According to one study, 40 percent of Americans will be "sharing economy freelancers" by 2020, creating a host of new problems for tax and revenue agencies. "Tax laws lag behind these economic changes, further complicating matters," said Lappenbusch. "The sharing economy challenges were not envisioned by state legislators and revenue departments. The tax compliance improvement needs revealed in the research will help address these issues, but state tax and revenue departments must constantly evolve."

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