MassLive.com, Springfield, Mass.
A report published Tuesday makes the case for implementing sale tax changes laid out in the governor’s fiscal 2021 budget proposal — filed long before COVID-19 preoccupied state officials — to help drive revenue to state coffers faster during the pandemic.
Gov. Charlie Baker’s budget proposal may seem like a relic of the pre-pandemic economy. Yet a white paper from the Pioneer Institute, a Boston think tank, argues now is the time for the state to change the sales tax remittance schedule to collect sales taxes sooner and to pave the way for the state to collect sales taxes when a purchase is made, at least from retailers with annual sales of $10 million or more.
“As state government leaders scramble to find ways to continue funding essential services, provide local aid to cities and towns and make contractually obligated payments on public debt and collective bargaining agreements, they should consider enacting a bill pending in the current legislative session that would modernize and speed up sales tax collection from large-scale internet retail sellers without affecting hard-pressed small and medium sized retailers,” states the white paper, authored by Greg Sullivan and Andrew Mikula.
They call for Massachusetts should join 19 other states that have shifted their sales tax remittances to speed up collections, arguing technological advancements would make the process feasible, especially for larger retailers.
“At the very least, there’s a one time gain of several hundred million dollars that would help, and there’s an improvement in collection, anyway,” Sullivan told MassLive.
The Baker administration, which has repeatedly proposed the modernization of sales tax collections, projected in January that the state would receive a one-time $237 million boost in revenue by accelerating sales and room occupancy tax remittances. But that was before a global pandemic prompted the governor to shut down non-essential businesses and the state saw record-breaking jobless claims and drastic declines in monthly tax collections.
Under the current system, a customer who uses a debit or credit card to pay for goods directs the debit or credit card company to send the money, including the sales tax, to the business. The business then has 50 days to send tax payments to the state Department of Revenue.
Baker’s provisions have called for businesses that owe at least $100,000 in sales taxes or $100,000 in room occupancy and meals taxes will have to make collections from the first three weeks of each month in the month’s final week, getting revenue to the state faster. Had the state budget process not been disrupted by the coronavirus pandemic, the sales tax modernization provisions could have been debated and, if approved by lawmakers, set to take effect as early as July 1.
Baker’s provision would have paved the way for financial institutions to automatically send the sales tax to DOR instead of sending it to the business first, which would have taken effect by 2023.
“It’s impossible for me to imagine that we won’t at some time get to the point where a lot of these transaction are as real-time on the public side as they are between enterprises, businesses and individuals,” Baker said in January, when he reintroduced the idea as part of his budget.
The economic toll of the coronavirus pandemic — and the damage dealt to Main Street — remains unclear. One of several states that pushed back its tax payment deadlines, Massachusetts won’t see how much it received in tax collections, and how it compares to collections in previous years, until after July.
DOR’s revenue report for May shows the state received $2.25 billion or 8.3% less than it expected to this year, and it’s unclear how much is due to the tax payment extension to July 15.
The Massachusetts Tax Foundation projects a $6 billion drop in projected tax collections with a third of that coming from sales tax revenue losses, albeit some of it due to the tax payment extension. MTF projects the state will see major revenue losses if consumers avoid spending money and if colleges and universities get fewer students on campus to spend money locally.
The Pioneer Institute report argues major retailers, especially those that make money off of online sales, have the tools to track and, eventually direct sales tax revenue in real-time to DOR. The report notes that out-of-state companies that make at least $100,000 in online sales in Massachusetts were required to start collecting state sales taxes in October.
A 2017 DOR report on Baker’s sales tax modernization initiative highlighted two pilots, a two-year pilot at New York-based Morso bar and grill and one by Tony C’s Sports Grill in Massachusetts during the fourth quarter of 2016. The Massachusetts business stated no changes were made to the point-of-sale system, and the New York business claimed the changes would ease the burden on small business owners by eliminating the two or three days a month they spend sifting through sales tax payments, according to the 2017 report.
Business leaders who say small business owners would incur massive fees from making the technological upgrades required to facilitate real-time sales and use tax remittances. Others, such as Avalara executive Scott Peterson, argue that few businesses supply the breakdown of their electronic sales to the third-party payment processors who would have to send the sales tax payments directly to the state.
“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,” Peterson wrote in an op-ed in February, before the coronavirus pandemic, and the economic fallout, hit Massachusetts. .”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.”
One of the staunchest opponents of the sales tax modernization proposal is the Retailers Association of Massachusetts. When Baker announced the proposal in his fiscal 2021 budget, RAM said it opposed the language in the budget that authorized DOR to set the tax collection schedule instead of the Legislature.
RAM also said the shift to real-time payments by 2023 drew opposition from retailers, credit and debit card companies, third-party card processors and banks. “The opposition is united, as those changes would impact the entire payment system,” RAM told its members at the time.
The Institute called for the state to move forward with a modified version of real-time remittances that only affect major retailers that make $10 million a year in sales. Those would include Walmart, Amazon and Etsy.
“Phase two of Governor Baker’s proposal (real-time sales tax collection) makes sense and is entirely feasible for a subset of transactions,” the report states, referring to Amazon, Walmart, Etsy, eBay “other high-volume internet sellers as designated by the commissioner of DOR.”
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