With the evolution of modern technology, U.S. businesses need to prepare for substantial changes related to sales and use tax compliance requirements. Over the next three to five years, there will be wholesale changes on data and reporting requirements that all businesses should begin to prepare for today.
Recently, tax authorities have begun a wholesale shift in indirect tax compliance to enhance their collections and audit processes.
For example, the state of Massachusetts recently proposed a new collection program in its state budget. The plan called for taking advantage of this new digital landscape and would require real time tax remittance on sales processed through a third-party payment processor, essentially on credit cards and other forms of electronic payment platforms.
Real-time tax remittance would require the third-party payment processor to remove the sales tax applicable for each transaction that flows through its system. The processor would then send the tax payment directly to the state at the time it forwards the sales proceeds to the seller. The state would receive tax revenues sooner and reduce the risk of losing tax revenues to those who collect, but then don’t remit. This change would be a wholesale shift from current processes that generally call for a monthly remittance of tax revenues collected.
Is real-time taxation possible in our new digital world?
Technically yes, but real-time tax collection is not without issue. Major technology changes would be required by merchants, the third-party payment providers and the state to actually implement this system, resulting in substantial costs for businesses and the government to implement. The true benefit to the state is less than compelling – aside from getting its money sooner – as there is no increase in actual tax collections.
While there have been many advances in technological systems in the past decade, it seems real-time tax payments may still be a bridge too far to cross, but real-time tax enforcement is likely. There are examples where governments have utilized technological advancements to truly streamline tax compliance and increase tax collections. While not currently widely used in the United States for sales and use tax compliance, businesses would benefit from getting prepared and understanding these changes, as they will be coming to the United States soon.
Instead of real-time tax remittance, many governments have begun systems of real, or near real, time tax reporting. Essentially, businesses are required to submit files of all sales and purchase transactions to the tax authority, which includes all relevant information - items being sold, price and tax calculated. That transactional data is then analyzed and compared to the monthly reporting/tax filings submitted by the taxpayer. With that level of detailed transactional data, the tax authority can quickly compare it to the monthly tax returns to determine if the seller correctly calculated taxes at the time of transaction and reported correctly at the end of the month.
Brazil was the first country to mandate e-invoicing with its nota fiscal electronica requirements. In this mandate, all invoices must be submitted to the tax authority, which are reviewed and provisionally approved before any items may be shipped. Once reviewed, the invoice receives an authorization code. Only after that code is received can the seller ship the items. If the items are shipped prior to that authorization, the goods can be seized by the government.
Once the Brazilian tax authorities have all the transactional details, they then can compare that data to the monthly tax reports filed by the seller and determine accuracy of those filings.
Mexico has also adopted a similar system and has recently rolled out an electronic auditing program that it expects to cover all taxpayers by 2018. After collecting the detailed transactional data from the sellers, Mexico automatically compares it to the monthly tax reports. If the system finds discrepancies, it will automatically issue a notice of assessment with interest and penalties.
This concept is not just limited to Latin America. Spain rolled out a similar system this past July, though the tax reports will be due four days after the sales invoice is created. Hungary will also be implementing its system in 2018. In the U.S., the state of Colorado’s remote seller reporting law requires all vendors who do not collect CO’s sales tax to submit a detailed annual report to the Department of Revenue, providing information on every sale into the state. The regulations to implement this law are forthcoming.
It’s important to note that tax authorities are not only requesting data for compliance with local laws, but also for governments to share data on taxpayers. Currently, the focus is on direct tax compliance, with the introduction of country-by-country reporting under the BEPS (base erosion and profit sharing) initiative requiring businesses to produce a standardized report of revenues by country. Those reports are then shared and analyzed with countries exchanging information. The Foreign Account Tax Compliance Act (FATCA) in the United States, Crown Dependencies and Overseas Territories (CDOT) in the United Kingdom and the Common Reporting Standard are being implemented around the world. These acts impose reporting requirements on financial institutions to provide detailed reports on assets held by citizens in other countries.
Some of these data intensive reporting requirements have been up and running for many years and have proven an effective avenue for governments to improve compliance and increase tax revenues, which is why so many other implementations and proposals are being introduced today.
With governments aware of all the detailed transactional data available within a company, soon they will either start or continue to demand that data with more and more detail at quicker intervals. In the near future, it is expected that the requirement for the monthly sales and use tax return will go away. What will take its place is a real-time transactional file upload, followed by a notice from the taxing jurisdiction of the total taxes due at the end of each month.
For U.S. businesses, the digital revolution has been helping drive business growth and provide insight and analytical options that were not available just a few years ago. However, tax professionals need to understand just how valuable data is to the tax authorities. New data and real-time tax enforcement and reporting requirements will be coming soon, and tax professionals must be prepared to meet these new challenges and requirements.
As Principal, Indirect Tax at Sovos, Matt provides strategic direction, guidance and recommendations for product enhancements and development to keep Sovos customers ahead of complex regulatory changes. Matt is also tasked with fostering both government and industry relationships that support Sovos’ global Intelligent Compliance initiatives. Matt has over 17 years of experience in tax compliance, which includes developing a tax counsel within the Sovos internal tax department. He later advanced to director of tax research and senior director of tax positions within the company before taking on his current role. Matt is currently a member of the Technical Advisory Group of the OECD (Working Party #9), which drafts model legislation and implementation guidelines for the taxation of cross border services.