As COVID-19 tax relief ends, states will need technology to recoup revenue
- By Scott Peterson
- Jul 29, 2020
At the onset of the COVID-19 pandemic, federal, state and local officials swiftly put relief measures in place to help individuals and businesses weather the economic impact of the virus. Many states waived penalties and interest for late payments of sales tax and deferred filing dates until later in the year. Now, the relief measures put in place have started to expire and sales tax payments are coming due, even as the pandemic progresses. As states look for creative ways to continue addressing the impacts of the pandemic and economic recession, they will inevitably consider sales tax for new and expanded revenue streams to recoup the loss of expected revenue. However, for states to be able to effectively and comprehensively collect from new revenue streams, they must refine the technology used to manage tax collection.
Potential new sources of revenue for states
As state governments work to balance their budgets to pay for essential services and support programs, it is likely that they will look toward broadening sales tax to historically exempt goods and services and enforcing the compliance of remote seller laws.
Sales tax revenue from traditional brick and mortar retail shopping slowed during the pandemic, but some industries and sales channels saw an uptick in business under lockdowns. Everything from new and existing digital services to meal and grocery delivery applications could become new tax types for state taxing authorities. Some states, like Maryland, had explored taxing digital products and digital advertising prior to the COVID-19 outbreak, and while that didn’t materialize, it is likely that conversation will happen in more states as they navigate pandemic-spurred recession spurred.
The dramatic uptick in online shopping while Americans were under stay-at-home orders will also likely prompt more taxing authorities to increase the enforcement of remote seller laws. Today, 43 states and the District of Columbia enforce economic nexus, which requires remote sellers to collect sales tax based on economic activity within a state regardless of physical presence. With more transactions happening online during the pandemic, states may ramp up enforcement to generate more revenue.
Technology is needed to enforce tax collection in new industries
It makes sense for states to look at technology-enabled industries that have thrived during the pandemic as potential sources of tax revenue. However, to effectively enforce and collect sales tax revenue from digital-first industries like food delivery and streaming services, taxing authorities will ultimately be constrained by their 20th century technology infrastructure. States must consider how to process returns closer to the time of the transaction to mitigate fraud, while also increasing capacity to handle large volumes of tax returns as more businesses trigger additional obligations. This technological challenge isn’t necessarily new, but the need, bolstered by historic revenue shortfalls, mounts as more transactions take place online.
Outsourcing technology could enable new tax types for states
The technological gap in enforcement and collection of sales taxes on digital-first transactions faced by taxing authorities is something that businesses have also been tackling in recent years, as economic nexus laws expanded their obligations. Many of those businesses have turned to tax automation and outsourced their sales tax compliance to keep pace with changing sales tax laws and remain compliant with changing regulations. Fortunately, taxing authorities can do something similar.
Twenty-five states have enlisted the help of outside providers to leverage the tax automation software and services delivered to businesses by technology companies known as certified service providers. CSP technology automatically calculates tax and submits sales tax returns and remittance on behalf of those businesses to the appropriate taxing authorities. The technology provided by CSPs ensures that businesses are compliant with state laws while reducing the number of unlicensed businesses that states must track.
The solutions provided by CSPs enable states to see transaction data occurring across tax types closer to real-time, while also providing a flexible technology infrastructure that allows tax authorities to scale their enforcement and collection efforts alongside technological innovation taking place across industries.
Traditional sales tax collection efforts are time-consuming, intrusive and outdated. As states work to recover from the financial impact of COVID-19 by identifying new sales tax opportunities in digital-first industries, they will likely be forced to take a close look at the technology used to manage the tax compliance lifecycle. As we move further into our new normal, states will continue to be pressed for revenue, and the U.S. sales tax framework will continue to become more complex. States will have to invest in modern applications that meet the demand of new technology-focused tax requirements if they hope to implement new tax types for increased revenue.
Scott Peterson is VP of U.S. tax policy at Avalara.