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Massachusetts Governor Charlie Baker (R), as part of his FY2022 budget proposal (HB 1) (Proposal), has again put forward a sales tax "modernization" initiative that includes a "real-time" sales tax remittance requirement. This requirement, if enacted, would impact both retailers and financial services companies that process credit card transactions. The Proposal would augment a recently enacted law requiring accelerated remittance of sales and use taxes, room occupancy excise taxes and local option meals excise taxes (i.e., optional local taxes on restaurant meals).

As currently drafted, the latest real-time sales tax remittance proposal (Section 25 of HB 1), effective July 1, 2024, would:

• Require all vendors to separately identify tax and non-tax amounts of charges when requesting payment from third-party payment processors if they (1) accept credit and debit card payments in Massachusetts and (2) have total gross sales exceeding a threshold to be set by the Massachusetts Department of Revenue (MA DOR)
• Require third-party payment processors to report certain information to vendors
• Require a third-party payment processor to remit daily the portion of charges identified by vendors as tax to the MA DOR
• Require third-party payment processors to report on a monthly return (1) total payments made to the Commissioner, (2) each vendor or operator to whom payments were made during the month, and (3) the amount of tax paid to the Commissioner during the month

Prior proposals

Governor Baker first advanced a similar provision on real-time sales tax remittance in his FY2017 budget proposal. Massachusetts enacted the requirement as part of that budget, contingent upon a study by the MA DOR of the feasibility of implementing the requirement within a year. In its 2017 report, the MA DOR concluded that such a system was too complex to implement rapidly, but it "did not identify any long-term logical or technological barriers to implementing" the regime given a sufficient implementation period. ¹ The MA DOR acknowledged, however, that the costs to taxpayers of setting up and continuously complying with such a system could be "very substantial."

The State Tax Research Institute (which is affiliated with the Council on State Taxation (COST)), in public comments ² delivered to the MA DOR, estimated those costs would exceed $1 billion for initial setup and approximately $28 million on a recurring basis. ³ As a result of these findings, the provision for real-time sales tax remittance from the FY2017 budget proposal was repealed.

Governor Baker again advanced similar provisions on accelerating sales tax remittance in each of his FY2018, FY2019 and FY2021 budget proposals. While these proposals were considered by the legislature, they did not make it into the final budgets.

Prepayment provisions enacted under FY 2021 budget

While the enacted FY2021 budget did not include a real-time sales tax remittance provision, it included a provision requiring accelerated remittance of sales and use taxes and room occupancy and local option meals excise taxes. Under this new provision, these taxes must be paid by the 25th day of the last month of the filing period, in advance of filing a tax return; the payment, however, must include the tax collected for any taxable sale made on or before the 21st day of the last month of the filing period. This accelerated-payment requirement will apply, effective April 1, 2021, to businesses that collected and remitted more than $150,000 in sales and use taxes or more than $150,000 in room occupancy and meals excise taxes in the prior calendar year. Tax collected during the remaining days of the filing period must be remitted at the required filing time of the return for that period.

Implications

Proposals for accelerating sales tax remittance 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 that do not require a physical presence in the jurisdiction in the aftermath of the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc.,⁴ present a risk of substantial new exposures for many taxpayers, including retailers; their vendors; financial services companies; credit card processors; and anyone else involved in collection and remittance of payments to vendors.

The proposed provisions for real-time sales tax remittance, if enacted, would not replace the accelerated remittance provisions; thus, taxpayers would have to determine which remittance provisions apply.

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ENDNOTES

¹ See Massachusetts Dep't of Revenue, Accelerated Sales Tax Feasibility Study: Report to Commissioner Christopher C. Harding (Oct. 2017).

² See Massachusetts Dep't of Revenue, Accelerated Sales Tax Feasibility: Public Input (Oct. 2017).

³ See State Tax Research Institute, Daily Sales Tax Collection System Could Cost Massachusetts Businesses $1.2 Billion (September 2017).

⁴ South Dakota v. Wayfair, Inc., 138 S.Ct. 2080 (2018).