In his fiscal year 2018 budget proposal, Massachusetts Governor Charlie Baker proposes a somewhat novel approach to the collection and remittance of sales taxes. Specifically, the Massachusetts Governor is proposing same-day collection and remittance. How is this possible? You ask? Through the assistance of third-party credit card processors. The thought is that at the time of sale such processors will immediately remit the sales tax due on the transaction. The effect of this proposal would be to bypass the “delayed” collection and remittance obligations otherwise undertaken by Massachusetts retailers.
We note that it is a “somewhat novel approach” because in recent years both Connecticut and Puerto Rico have attempted to effect similar proposals. Connecticut’s experience is noteworthy. In 2013, Connecticut legislation was put forth granting authority to the Commissioner of Revenue Services to “require any taxpayer with sales tax liability that is delinquent … to remit electronically the sales tax due on each sale made by such taxpayer by consumer credit or debit card or electronic transfer during each such period.” A taxpayer subject to this provision was required to “remit such taxes to the commissioner through a processor of consumer credit or debit card payments or electronic transfers approved by said commissioner.” Under this legislation, Connecticut could force delinquent taxpayers to use an “eligible payment processor.” to remit sales tax. Connecticut issued a request for proposal seeking an “eligible payment processor” to collect and remit sales tax from credit card transactions directly to the state. No one responded to this request by the stated deadline.
The desire of states to have real time sales tax collection and remittance is understandable. In a perfect world, this approach minimizes the risk to a state that the retailer may delay – or never remit – sales tax to taxing authority. Yet, this is not a perfect world. As with many legislative tax proposals, this one turns a blind eye to various otherwise glaring administrative and compliance-related issues.
A third-party credit card processor is not in a position to know how much money to send to a state taxing authority. Further, it is most certainly the case that retailers subject to any such legislation do not send the type of reports to credit card processors necessary to determine the sales tax due on the underlying transactions. In order for such a proposal to work, the credit card processors and retailers would need to work together to implement reports and processes not currently contemplated in their business relationships. This administrative burden is not to be underestimated.
In sum, while Governor Baker’s budget proposal may generate excitement, real time sales tax collection is unlikely to come to Massachusetts..