February 11, 2020
Massachusetts proposes "real-time" sales tax remittance by third-party payment processors
Massachusetts Governor Charlie Baker (R), as part of his 2021 budget proposal (the proposal, HB 21), again put forward a "Sales Tax Modernization" initiative that includes a "real-time" sales tax remittance requirement. This requirement, if enacted, would affect both retailers and financial service companies that process credit card transactions.
As currently drafted, the proposal would, effective July 1, 2023:
Effective July 1, 2020, the proposal would authorize the Department to require estimated sales tax prepayments for taxpayers or specific groups of taxpayers with over $100,000 in annual sales tax liability and would extend the general sales tax return filing deadline from 20 to 30 days after the relevant reporting period. The Governor's fiscal projections for these two "sales tax acceleration" provisions are up to $317 million in new revenue. 2
Governor Baker advanced similar accelerated sales tax remittance provisions in his 2017 budget proposal. Massachusetts enacted the requirement contingent upon a Department study of the feasibility of implementing the requirement within a year. In its 2017 report, the Department determined that the complexities of implementing such an accelerated sales tax remittance scheme were too extensive to permit rapid implementation, but that it "did not identify any long-term logical or technological barriers to implementing" such a regime given a sufficient implementation period. 3 The Department, however, acknowledged that the costs to taxpayers of setting up and continuously complying with such a system could be "very substantial." The State Tax Research Institute, in public comments 4 delivered to the Department, estimated those costs would exceed $1 billion for initial setup and approximately $28 million on a recurring basis. 5 As a result of these findings, the 2017 accelerated sales tax remittance provision was repealed.
Governor Baker again advanced similar accelerated sales tax remittance provisions in his 2018 and 2019 budget proposals. While these proposals were considered by the legislature, they did not make it into the final 2018 and 2019 budgets.
Accelerated sales tax remittance proposals have become ubiquitous in state legislatures around the country over the past several years. In 2019, a Missouri measure (HB 648) would have required sellers to use a payment processor to collect and remit sales tax from online sales, a New York proposal (AB 4887) would have required daily sales tax deposits into escrow accounts, and Connecticut proposals (HB 5891 and SB 877) were introduced to require daily sales tax remittance from sellers. In 2018, the Arizona State Legislature passed, but Governor Doug Ducey (R) vetoed, a bill (SB 1091) that would have allowed the Arizona Department of Revenue to "develop, adopt and use a payment system that enables the immediate remittance and collection of tax in real time at the point of sale." These are just a few recent examples of the numerous and varied proposals that have been advanced by state legislatures over the past decade.
This trend is expected to continue as states seek to identify and implement avenues for sales tax modernization. These proposals raise concerns for taxpayers and states alike, including substantial implementation and increased compliance costs, expanded record-keeping and reconciliation requirements, confidential data security risks, expanded audit and risk exposure, and additional strains on state tax administrative resources. These proposals, coupled with expanded state efforts in applying nexus standards following the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc.,6 present a risk of substantial new exposures for unwary taxpayers; their vendors; and financial services companies, credit card processors, and anyone else involved in collection and remittance of payments to vendors.
1 HB 2, 191st General Court §50 (proposing to add Section 16B by amending Mass. Gen. Laws ch. 62C) and §110 (effective date for HB 2 §50) (Mass. 2020).
3 See Massachusetts Dep't of Revenue, Accelerated Sales Tax Feasibility Study: Report to Commissioner Christopher C. Harding (Oct. 2017).
4 See Massachusetts Dep't of Revenue, Accelerated Sales Tax Feasibility: Public Input (Oct. 2017).
5 See State Tax Research Institute, Daily Sales Tax Collection System Could Cost Massachusetts Businesses $1.2 Billion (September 2017).
6 South Dakota v. Wayfair, Inc., 138 S.Ct. 2080 (2018).