Laboratories of Democracy: The Real-time Sales Tax Collection Experiment
- Sales and Use Tax
- December 16, 2013 | Scott Peterson
In 1932, U.S. Supreme Court Justice Louis Brandeis said that "a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country." (1) Supporters of state’s rights often reference Justice Brandeis’ statement when defending the right of states to be creative. They also quote him to ward off federal intervention.
However, life in 2013 is different from life in 1932. Today we live in a borderless economy full of thousands of different rules and procedures—the results of all these experiments. The ultimate effect of a state sales tax experiment is on a state’s consumers. Unfortunately, unlike science experiments conducted in a laboratory using chemicals, microscopes and Bunsen burners, sales tax experiments are conducted in a retail store using clerks, cash registers and software. A state cannot conduct a sales tax experiment without impacting a retailer. Retailers conducting business in multiple states can find state sales tax “experiments” to be frustrating and expensive. Nonetheless, new experiments continue to surface.
The latest experiment seeks to remove retailers from the sales tax collection equation.
The Experiment: real-time tax collection
Monthly, quarterly, annually, $300 a year, $150 a year, $60,000 a year, and $500 a month: each of these is either a sales tax filing requirement or the trigger for a new requirement. Filing requirements for every state are different and each has some state specific historical meaning. But for multistate retailers, different filing requirements simply complicate life.
Back when sales taxes were first created, there was no way to know how frequently tax returns should be filed. It is easy to imagine the first state’s decision as a negotiation between policy makers and retailers—and it created the pattern all the other states followed. Regardless of the historical reasons for a state’s decision, today states are paying more attention to filing deadlines because of the amount of money at stake. The National Association of State Budget Officers projects that states will collect a combined $216 billion in sales tax in 2013. (2) The sooner states can collect that much money the better their budgets.
To that end, there have been recent discussions in Connecticut and Puerto Rico about “real time” sales tax collection. The general idea behind “real time” tax collection is that sales tax is sent to the state at the time of the sale instead of being collected by the retailer and later sent to the state. For example, if a person buys something for $100 on December 9th, and there is $5 tax, the state would get its $5 on December 9th or 10th instead of waiting until the 20th day of the following month.
Both states are trying to solve a problem: some businesses spend the sales tax they collect instead of sending it to the state. They’re also trying to find a way to collect sales tax sooner--at the time of sale. Connecticut and Puerto Rico both want to develop a system whereby a business never possesses sales tax, and both think the key lies with credit card companies. Indeed, many a state tax administrator and state legislator have asked why credit card companies can’t simply send sales tax to the state when they send money to the retailer.
The Connecticut saga started with 2013 legislation that granted 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“. (3) A taxpayer so required “shall 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 the Commissioner would force a select group of delinquent taxpayers to use an “eligible payment processor.”
The Department of Revenue Services issued a request for proposal in the summer of 2013 seeking “an eligible payment processor.” The Connecticut request looked for credit card payment processors willing and able to send sales taxes daily to the state from the credit card payments they processed for the chronically delinquent retailers selected by the Commissioner. The deadline to respond to the request was September 3, 2013. No one responded. The question is whether no one was interested in getting between retailers and the state or whether it is actually possible to accomplish the task.
The Puerto Rico experience is different from Connecticut because of the relative recent (2006) adoption of a sales tax. Having adopted it, the state needs retailers to collect and remit it. It also needs a way to verify sales tax receipts during audits. But how to convince retailers to give a receipt? It turns out that while providing a receipt for a sale is often standard practice, there were retailers in Puerto Rico that did not typically provide receipts.
Puerto Rico’s solution was to require retailers to print a lottery number on their receipt. The hope was that consumers would demand a receipt so they could participate in the lottery. If the consumer demanded a receipt, there would be a paper trail and retailers would be inspired to collect the tax. Recent evidence suggests that the lottery system is not working.
Therefore the Puerto Rico Department of Treasury is developing requirements that will force all payment processors to transfer sales tax directly to the state on a daily basis. Failure to follow this requirement will result in the payment processor being denied the right to conduct business in Puerto Rico. This system will require direct deposit of all the sales tax collected via credit cards or other similar payment methods, and daily reports on cash and check sales.
Under this system, each day every retailer in Puerto Rico will send a file to their credit card processor telling the processor how much sales tax they collected. The credit card processor will then transfer that money to the state and send the sales money to the merchant. Effectively, every day retailers will get their money from the credit card processor and the state will get its money.
In addition, every day every retailer will send a report of its cash and check sales to an entity called an “aggregator.” The aggregator is a state chosen entity/business that will assist the state with the collection and analysis of the data.
What’s a retailer to do?
It is hard to imagine many retailers in Connecticut and Puerto Rico being thrilled by the idea of “real-time” tax remittance. Although half a dozen states require some retailers to make multiple payments each month, no state requires anything approaching daily remittances. As of this writing, no credit card processor sends sales tax to any state. Before a credit card processor could do so, it would need to know how much to send; and today, most retailers do not send reports containing the necessary information to any credit card processor.
It remains to be seen what will come of this sales tax experiment, and it seems clear that certain elements will have to be in place before it can function. Both the processor and the retailer would have to develop reports and processes they today do not possess.
(1) New State Ice Co. v. Liebmann, 285 U.S. 262 (1932)
(2) National Association of State Budget Officers “State Expenditure Report” published November 2013, (pg 91).
(3) Department of Revenue Services’ request for proposal.