Thinking Strategically About Sales Tax

Guest Author: Charles Maniace
Vice President, Regulatory Analysis and Design, Sovos

Those of us who have chosen sales tax compliance as a profession (and those of us who have had sales tax as a profession thrust upon us) may find it tempting to adopt the techniques and practices of those that came before us. In the old days, and those old days were not too long ago, rate, rule and form changes were not uncommon, but they certainly did not happen at the frenetic place of today. Nor did many our forbearers need to deal with a nationwide nexus footprint or expanding global tax requirements. They could afford to take a more tactical approach, evaluating each new challenge as it presented itself, devise a solution and move on to the next. In so doing, they could feel reasonably confident they were keeping their company safe from significant audit exposure.

New economic nexus standards, unclear marketplace facilitator requirements, new levies on digital advertising and digital services, accompanied by thousands of bills making their way through state legislatures are disruptive enough. But it’s time companies start thinking about how the state audit experience might change in the digital age. In short, it is time to start thinking strategically about sales tax.

How to start thinking strategically?

A strategic mindset requires today’s tax professional to understand three fundamental concepts:

1. There is no way to predict what disruptive new requirement will come next.
2. The timeframe between when a new requirement is announced and when it becomes effective will be short.
3. The answer to solving most new tax challenges will likely come through technology.

Think about what happened in Massachusetts where it adopted a new “advance payment” requirement effective April 1, 2021. Under the law, taxpayers with cumulative annual sales tax liability from 2020 of more than $150,000 must pay, on the 25 of the month, any tax collected between the 1 and the 21 of that same month. Would you have been ready to meet this requirement? If not, in this case you got lucky as on March 31, the Massachusetts Department of Revenue (DOR) added a “safe harbor” provision specifying that any assessed penalty would be waived if their remittance on the 25 equals 80% of their total sales tax liability from the prior month.

What’s been weighing even more heavily on my mind is what’s going to happen when departments of revenue begin to understand that traditional audit methodologies will not be effective in enforcing compliance against a world of ecommerce sellers and marketplace facilitators.

Will they turn to “continuous transaction control” regimes, which have proved incredibly successful across Latin America, Brazil and parts of Europe? In those cases, sellers are required to send invoice-level transactional details in real or near-real time to the tax authority. Will they adopt SAF-T or similar requirements? This represents a uniform international standard for the electronic transmission of transactional data from taxpayers to governments. Will they look to the UK and its “Making Tax Digital” initiative, whereby taxpayers are required to keep digital tax records and use software to submit their VAT returns?

What comes next?

If left to hazard a guess as to what the future may hold, it lies in a combination of digital audit files and state certification of tax engines. In fact, this trend is already beginning to manifest. Apart from the 24 member states of the Streamlined Sales Tax Agreement, the Commonwealth of Pennsylvania has instituted its own Certified Provider program. The state of Illinois has done the same, with similar programs being actively considered in other states. While states are not necessarily known as being “gentle” with their taxpayers, another idea (which I cannot claim as my own) is a “voluntary” digital audit file. This requires some taxpayers agree to submit ledger data in a specified file format to the state periodically, and in exchange, governments agree to limit the taxpayers audit liability.

Sales tax is hardly immune from global technological trends. The time is now to strategically prepare for the digital future of tax.