Across the globe, governments are turning to digital technology such as data sharing to increase tax compliance. It was inevitable. If innovation enables us to pay bills from our cell phones and reach customers anywhere in the blink of an eye, it can also help tax authorities track transactions and uncover scofflaws. In fact, the development of data sharing technology is creating a taste for what it can provide: transparency.
Brazil, which leads the world in electronic tax compliance, is requiring more and more companies to upload digital records of every transaction into the Public System of Digital Accounting. This increased transparency is revolutionizing their tax administration, giving tax authorities immediate access to business transactions and putting a damper on tax evasion. Eventually, perhaps, it will also help simplify one of the most complex indirect tax regimes into the world. Likewise, most tax requirements will be fulfilled online in India after the country transitions to GST later this year; since all transactions will be tracked, GST is expected to curb the use of black money and enhance and simplify compliance.
In the United States, digital technology such as data sharing is still in its infancy, but it’s beginning to be used to enforce tax compliance. As it develops, it will “change the way tax departments and tax authorities work.” More and more, state officials are seeking transparency and developing the ability to acquire information in real time. In fact, data sharing is already beginning to affect the way tax officials and taxpayers interact in some parts of the country.
Sharing data through use tax notification requirements
Colorado heads a handful of states that will soon use data sharing technology to improve sales and use tax compliance. Use tax notification requirements enable businesses to share information about customers with tax authorities, who can then use that information to ensure those individuals fulfill their use tax obligations. Consumers are liable for use tax on taxable transactions if sales tax wasn’t collected by the seller at the point of sale, and yet without the help of data sharing technology, it is extremely difficult for tax officials to enforce use tax compliance.
In an attempt to enhance use tax collections, Colorado in 2010 imposed a use tax notification requirement on noncollecting vendors making at least $100,000 in total gross sales in Colorado during the previous calendar year. These businesses are required to send an annual purchase summary to customers who purchased more than $500 worth of taxable goods in a year, along with a reminder that use tax is owed to the state. Additionally, they must send an annual customer information report listing the names, addresses and total purchases of their Colorado customers to the Colorado Department of Revenue.
Colorado’s use tax notification requirement has never been enforced — it’s been under dispute since its inception — but that will soon change. The Supreme Court of the United States let the law stand last December, and the notification policy will be “fully implemented and enforced” beginning July 1, 2017. The victorious legal battle has paved the way for other states to follow Colorado’s example, and they’re lining up to do just that: Use tax notification requirements are set to start on July 1 in Louisiana and Vermont.
Certain dealers making sales in Louisiana will be required to provide to the Department of Revenue an annual statement for each customer, containing their name, address, and amounts of sales. They must also give an annual statement of purchases to each purchaser, along with a reminder that use tax is owed.
In Vermont, certain noncollecting vendors will have to inform all customers that use tax is owed and provide certain consumers with the total amount they paid during the previous calendar year. The law does not require businesses to share customer data with the Vermont Department of Taxes — at least not yet. However, the Vermont Legislature is considering a bill that would require certain vendors to provide to the Department of Taxes an annual statement for each purchaser, as in Colorado and Louisiana.
Transparency is burdensome
There’s little doubt that these use tax reporting notifications will increase transparency. If they also enhance tax revenue, this type of data sharing will almost certainly be emulated. Already, use tax notification measures are making their way through the Arkansas, Hawaii, and Pennsylvania legislatures. Tax officials in these and other states will be watching Colorado, Louisiana, and Vermont, and if they like what they see, even more states will embrace data sharing to help close the gap in sales tax revenue that is growing from untaxed remote sales, digital transactions, and services.
While data sharing has great potential to simplify tax collection and administration for states, it can create additional burdens for the businesses that will access, manage, and share data. The need for an innovative tax compliance solution is therefore greater than ever. In today’s world, technology is needed just to keep pace.
Avalara’s tax automation software uses the cloud to facilitate tax compliance in real time. Learn more.