Real-time tax remittance is back on the table in Massachusetts

Sometimes, persistence pays.

Since taking office in 2015, Massachusetts Governor Charlie Baker has introduced several plans to accelerate payment of sales tax and room occupancy and meals tax. He’s at it again, and this time, at least part of his plan could be adopted.

Transaction tax payments in Massachusetts and other states are collected over the course of a month and remitted toward the end of the following month. It can take up to 50 days, or longer, before collected taxes are available for use. Accelerating remittance would give Massachusetts access to tax revenue much sooner.

The latest plan was introduced in the governor’s revised Fiscal Year 2021 (FY21) budget recommendation. As in many other states, the budget conceived before COVID-19 needs to be adjusted. In introducing the new plan, the governor’s office said sales tax acceleration would help fund economic recovery and development efforts for small businesses, “as they navigate the COVID-19 economic landscape.”

Gov. Baker pointed out that the revised FY21 budget proposal (Revised House 2) modernizes taxes without raising them. If his plan is approved as introduced, modernization would occur over two phases.

The first phase would only affect businesses that collected and remitted more than $150,000 in sales tax or room occupancy and meals tax in the prior year. According to the budget executive summary, phase one would not apply to “nearly 95% of Massachusetts businesses.”

Starting in FY21, affected businesses would be required to remit collections from the first three weeks of each month in the final week of the same month. Taxes collected during the final week would continue to be remitted in the following month, as now. Reconciliation of the monthly filing would also be due the following month.

Phase one would last three years and fund:

• Economic growth and development to mitigate the economic impacts of COVID-19 ($100 million)
• The Massachusetts Bay Transportation Authority ($40 million)
• The Massachusetts School Building Authority ($40 million)

According to the budget summary, many businesses subject to the accelerated filing requirement “have benefited from the changing economic landscape and new consumer patterns.” It’s time to give back.

During the second phase, which would start in 2024, all retailers and credit card processors would be required to “capture sales tax at the time of purchase.” The tax collected through credit cards and other electronic transactions would be remitted daily. Retailers are already required to file and collect sales tax electronically.

As noted above, this isn’t the first time Gov. Baker has pushed a plan to “modernize” sales tax. His earlier attempts were unsuccessful. The Retailers Association of Massachusetts called the 2017 plan  “not a cost effective or workable solution,” and the Council On State Taxation said it “would impose staggering initial and recurring costs to businesses.”

So, is the current plan likely to be approved?

Scott Peterson, vice president of government affairs at Avalara, says it’s too soon to know, “although phase one seems very likely.” He explains, “Opponents of acceleration suggested phase one to the governor hoping that would keep him from proposing phase two. Now they might get both.”

Phase two would be considerably more burdensome for both businesses and payment processors. When Massachusetts solicited feedback on this idea in 2017, the Associated Industries of Massachusetts (AIM) urged the Department of Revenue “to determine that this policy is neither feasible nor cost-effective.” AIM said daily remittance would:

• Create compliance burdens for businesses and payment processors
• Complicate audits
• Discourage physical stores from accepting credit cards via mobile devices
• Hurt niche proprietors (e.g., flea market vendors)
• Increase barriers to starting a business
• Increase costs for retailers and payment processors
• Reduce economic growth in Massachusetts

Commenting on an earlier version of the FY21 plan in Accounting Today, Peterson said, “While the breakdown of electronic sales data is most likely available for most businesses, digesting and transmitting the data to payment processors will take time, money and technological resources. Without reliable sales information from sellers, it would be nearly impossible for payment processors to remit the correct amount of tax, and even harder for a state to enforce the liability on the payment processor.”

Peterson explained that complying with real-time remittance requirements would mean retailers “would have to completely overhaul their reporting processes and technology, costing them time and money.” Processors would also need to make substantial investments in order to fulfill the new obligations.

In 2017, the State Tax Research Institute estimated banks, payment processors, and retailers would need to spend more than $1.22 billion to upgrade their systems and $28 million annually to comply with the proposed daily remittance requirement. The cost of compliance almost certainly would be even greater now.

The real-time remittance requirement Gov. Baker has proposed is a hard sell. There’s likely to be less resistance toward another sales tax modernization proposal of his: Outlawing the sale and installation of automated sales suppression devices (aka, sales tax zappers), which help businesses evade taxes by falsifying electronic records. It’s already illegal to buy and install sales tax zappers in more than 20 states.

No matter what ends up happening in Massachusetts, retailers can streamline tax compliance by automating sales tax collection, remittance, and filing. Visit the Avalara tax compliance platform page to learn more.