For decades, sales tax returns have been the responsibility of the businesses making the sale. Businesses collect the appropriate amount of tax on transactions and reconcile the tax owed to the various tax authorities until a filing period comes around. However, as more commerce happens online, some authorities in the U.S. are looking into accelerating the collection of sales tax. The move would radically change how businesses have to manage tax returns, but could also pull credit cards and other payment processors into the mix.
For the sixth year in a row, Massachusetts governor Charlie Baker has included language in his budget requirement that would not only accelerate the payment and collection of sales tax in the state but also impose new obligations on payment processors.
The proposal defines a “third-party payment processor” as, “any person in association with credit card, debit card or similar payment arrangements that compensate the vendor or operator in transactions.” A payment processor that receives a request for payment from a business would be required to directly pay the sales tax to the state on a daily basis.
Because details on how this requirement would work on a day-to-day basis are thin today, payment processors should consider the many ways this could impact their operations. Here are three main impacts payment processors should keep in mind:
1. Data visibility challenges
Payment processors would have to adjust technology and processes to gain greater visibility into the details of every retailer’s sales. Processors would need to know how much of each transaction they’ve processed is tax, which is information that must come directly from each retailer. Today, it’s unlikely that many retailers provide the breakdown of their electronic sales to payment processors.
Gaining the data visibility needed would cost time, money, and resources for both payment processors and retailers. However, without granular transaction data, payment processors would face a steep challenge when it comes to accurately remitting sales tax to authorities.
2. Sales tax collection challenges
Payment providers would need to be able to transfer sales tax collections on behalf of their customers on a daily basis. Today, the payment date for sales tax returns in most states is the 20th of each month, to give businesses time to close their books. Because many retailers are unaware of how much sales tax they’ve collected until they process their books monthly, an investment would need to be made from both the payment processor and retailer to increase data visibility.
3. Shopping behavior challenges
Processors would need to account for the fluidity of sales (a purchase is made on Monday, but returned Thursday). As it stands, retailers often have the ability to handle the return of sales tax charged for returns because the transactions generally happen within the same month and they can make the adjustments before they remit the tax to the state. If a payment processor is remitting tax on behalf of retailers on a daily basis, adjusting for returns and credits could become a complex and cumbersome process to manage.
As tax authorities move closer to real-time compliance, they will have to address the challenges that would be created for retailers and payment providers before they can effectively enforce new requirements. Still, there will be inevitable challenges for payment providers that they will have to address as tax authorities begin to shift some of the sales tax obligation away from retailers.
While we’re likely years away from real-time compliance being a viable requirement in the U.S., other parts of the world are moving closer to e-compliance and real-time tax management as ecommerce grows. Being aware of developments outside of the U.S. can help inform and prepare businesses for what is likely to make its way to the U.S.
Real-time compliance will have far-reaching implications for the broader business community. While payment providers will need to make investments to comply, the shift to real-time compliance will not happen in a vacuum. Businesses, payment processors, and governments will have to make adjustments in order to facilitate compliance in a digital-first, real-time manner.
