States want sales taxes in real time
Even before the pandemic hit, states were looking for ways to increase their revenue. Of course, as a result of the pandemic and the accompanying shutdowns it engendered, many states are facing unprecedented shortfalls in revenue. States have sought to remedy this by raising taxes, broadening their tax base, and going after remote sellers and marketplace facilitators in the wake of Wayfair. They are also seeking a quicker remittance of tax revenue owed.
The governor of Massachusetts, Charlie Baker, recently introduced a budget for the state’s next fiscal year, which includes a plan that will require businesses to remit sales tax faster. The proposal isn’t a first in the U.S. In fact, this is the third time the state has pushed for faster tax remittance since 2015, and similar proposals have been seen in Connecticut, Nebraska, New York and Puerto Rico.
The legislation implements two phases of payment accelerations over a four-year period, according to Scott Peterson, vice president of U.S. Tax Policy and Government Relations at Avalara.
Under Phase 1, beginning in the state’s fiscal year 2021, each business that collected and remitted more than $150,000 in sales tax or room occupancy and meals tax in the prior year must start remitting collections from the first three weeks of each month in the final week of the same month. This will continue for three years until Phase 2 starts.
Under Phase 2, beginning in 2024 all retailers will pass sales tax information to their credit card processors, and the credit card processors will remit sales tax on credit card and other electronic transactions on a daily basis.
“The conversation has been going on for eight or nine years, said Peterson. “It never progressed because people didn’t think it was possible, but now it’s evolved to the point where people have concluded that this is possible, but at what cost?”
“Government has the belief that they should get their sales tax revenue in real time — at the time of the sale,” he continued. “The reality is that today there’s no such thing as real-time money, though we have real-time credit when we use a credit card. What is taxed is the grant of credit.”
“Today, the only time something happens in real time is when someone pays cash,” he said. “But if I write a check or use my credit card, it takes one or two days to get the money. The financial world is spending a lot of money to try to reduce that amount of time. In theory, everyone wants their money at least on the same day. It’s possible, but it’s expensive.”
“Traditionally, when a credit card company settles up with a retailer, the vendor gets paid the price of the product, plus sales tax, and minus the credit card company’s fee,” said Peterson. “What Massachusetts is proposing is that, instead of sending back all the money to the merchant, the credit card company would send a portion directly to the state’s Department of Revenue. The transaction would be the same as it has always been, except that the money goes to two places instead of one.”
In theory, this should not be too complicated, but in practice it’s extremely complicated, according to Peterson.
“It all begins with the merchant charging the correct amount of sales tax — it has to be the right rate for this to work. During a credit card purchase, the merchant’s system sends specified data to the credit card system, often just the transaction total. For the credit card company to be able to send sales tax revenue to the state, they have to have that data from the transaction. Merchants that only send transaction total today will have to change their system to include date, total of transaction, and the portion of the transaction that was sales tax.”
Complicating factors include the fact that tax rate varies by product type, and there can be several tax rates in a city or county due to special taxing jurisdictions.
“A merchant could have two stores in one city, sell the same product between stores, and charge two different sales tax rates for that same product,” said Peterson. “The system has to know that Store A has one rate, and Store B has another rate associated with the product. And the DOR has to figure out how to separate Store A sales from Store B sales.Then the merchant must get their system to give credit card processors enough information to settle up with the merchant and the state.”
Every merchant selling into Massachusetts would follow this same process, according to Peterson: “And Massachusetts would have sales tax revenue coming in from hundreds of credit card processing companies for thousands of merchants representing millions of transactions. The DOR will have to keep track of that. The merchant will have to provide an identifier that the credit card company can send along with the sales tax remittance, so when it hits the DOR website, they’ll know Amex just sent 14 cents for a customer that just made a sale in Massachusetts. It will have to be associated with an active sales tax license for someone licensed in Massachusetts in-state and out-of-state merchants, due to economic nexus generated by Wayfair.”
Other states are already doing pre-payments, Peterson remarked. “That part isn’t new,” he said. “But Phase 2 real-time collection is all new. And if one state does it, others will likely follow. All merchants in the world would have to change or upgrade to this system in order to give credit card companies all the data they need to remit tax.”
The online merchant that only accepts credit cards would have it easier, remarked Peterson: “Their credit card processor is responsible for all sales tax remittance. But for sellers that accept non-credit card forms of payment, their return needs to account for all other ways that they were paid; this may be a significant impetus to drive merchants to accept credit cards only, simply for ease of reporting sales tax.”