Liz Armbruester, SVP of global compliance, Avalara Feb 9, 2021
For hundreds of years, sales tax returns have been collected and held by sellers until a filing period comes around. However, as our society has become increasingly digital-first, advancements in technology and digital commerce have pushed more governments to want tax payments made sooner.
While some tax authorities are years ahead of others when it comes to faster tax collection, all signs point to a future where payments will be defined by near-real-time tax compliance.
E-invoicing & e-reporting trends
From Brazil to India, tax authorities have adopted legislation known as e-invoicing that requires businesses to provide invoices to the government before issuing them to customers. In Europe, France plans to impose mandatory B2B e-invoicing and e-reporting beginning in 2023. E-invoicing has gained popularity worldwide as governments look to cut down on payment and tax fraud on digital purchases.
Outside of e-invoicing, other movements to bring tax compliance closer to the transaction have surfaced in recent years. For example, in the US, which often lags behind the rest of the world in tax process enhancements, Massachusetts Governor Charlie Baker has introduced several proposals to bring sales tax collection closer to transaction times. The proposal would take real-time compliance to the next level by increasing the obligation for payment providers specifically.
Using a two-phase approach, phase one would require businesses that collect and remit more than $150,000 in sales tax to remit collections from the first three weeks of the month in the final week of the same month. In phase two, all retailers and credit card processors would be required to “capture sales tax at the time of purchase.” The tax collected through credit cards and other electronic transactions would be remitted daily.
In most cases, these legislative changes are intended to mitigate real issues impacting tax revenues worldwide — like tax fraud. Regardless, as indirect tax remittance moves closer to the time of the transaction, sellers and their payment partners will face new challenges and requirements.
Timely, accurate tax calculations key at POS
Unlike traditional indirect tax returns, the shift to real-time compliance will shorten the window of time typically available for reconciliation and adjustments. The real-time nature of reporting will reduce the time businesses have to get compliance right, so reliance on automated solutions will likely increase to handle an uptick in speed and demand.
Businesses will not only face the increased burden of reporting more quickly and more frequently, but they will also have to account for the expansion of e-commerce sales as well. E-commerce in the US grew 44% in 2020 alone — illustrating the rapid acceleration of online sales. As e-commerce adoption continues to grow, businesses will face increased complexity related to online indirect tax obligations in the form of remote seller laws. Combining the complexity of online tax laws with the future of real-time compliance compounds the pressure on businesses to get tax right at the transaction time.
The margin for error will become close to zero over time, meaning that sellers and payment providers will need to ensure every transaction calculates the right amount of tax to avoid penalties.
Investments in technology will be critical
While real-time compliance isn’t likely to begin tomorrow, businesses and payment providers should begin preparing now. Real-time compliance will require additional technology investments to ensure compliance. Sellers can begin examining their IT and finance systems to see what improvements will need to be made to account for real-time reporting — a process that could quickly become costly and time-consuming.
Technology will also be required to manage the increased amounts of data businesses will have to handle daily. To comply with faster compliance deadlines, every transaction, invoice, and account balance will need to be digitized and readily available.
It’s important to note that investments in technology won’t be exclusive to sellers. As illustrated by the Massachusetts proposal, payment processors will likely be on the hook for sales tax remittance facilitation in the future. These processors will need to have the functions capable of collecting digital payments for their merchants in real-time and facilitate the data to tax authorities on a large scale.
The world of real-time compliance is rapidly approaching. As more commerce takes place online, tax complexity will increase for sellers and payment providers alike. As real-time compliance gets closer to reality, the payments function’s backend will be radically different from what we know today. Sellers and payment processors alike will need to make significant investments in technology and tax content to ensure that taxes are accurately calculated and remitted on every digital transaction.
Editor’s note: Avalara maintains a useful, free, quick reference guide to standard and reduced VAT (Values Added Tax) and GST (Goods & Sales Tax) rates in most major countries.
Liz Armbruester is Senior Vice President of Global Compliance at Avalara. The company helps businesses worldwide achieve compliance with transactional taxes, including VAT, sales and use, excise, communications, and other taxes, using comprehensive, automated, cloud-based solutions.
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