Sales Tax Slice: Real-Time Sales Tax Collection Might Be Closer Than You Think


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On Aug. 30, a restaurant owner in Bellevue, Wash., entered into a plea agreement for use of sales suppression software, also known as “zapper” software, to evade payment of sales taxes, as previously reported by Bloomberg BNA’s Paul Shukovsky. Although the use of such software is not a new problem for revenue departments, this case marks the first time a business owner has been subject to criminal prosecution for it in the United States, according to the Washington Attorney General’s office. While news about zapper software may not be of particular interest to the majority of taxpayers who keep legitimate business records, the terms of the plea deal have the potential to impact retailers and taxing authorities worldwide: to avoid jail-time, the defendant agreed to real-time monitoring of the restaurant’s books by the Washington State Department of Revenue.

Under the terms of the agreement, software will be installed on the restaurant’s cash registers that allows the department to record sales as they are entered into the system. The software also allows the department to view those records instantaneously, without having to physically visit the restaurant or go through audit procedures. Though the use of this software in Washington is currently limited to cases of fraud, the availability of this type of technology could change sales tax administration as we know it. Time-consuming audits and lengthy returns would no longer be necessary if businesses could opt to (or were required to) use software that reported all sales to the relevant department of revenue immediately.

Sales monitoring software also brings us a step closer to real-time remittance of sales tax. The combination of the availability of instant reporting methods and increased reliance on electronic payment methods make it possible for retailers to submit sales tax on transactions as soon as it is collected from a customer. The Connecticut Department of Revenue Services explored this idea in 2013, after the legislature enacted a sales tax collection pilot program. The department opened applications for a program under which credit and debit card processors would remit sales tax directly on behalf of delinquent taxpayers. Despite the request for applications and the department’s attempts to reach out to eligible payment processors, no applications were submitted.

The department identified significant costs in upgrading systems as a major impediment to attracting applicants, however, privacy concerns are also an issue. Not only would real-time remittance through payment processors require businesses to provide more information to state taxing authorities, but it would additionally require them to submit this information to payment processors. Credit and debit card companies generally only know the total amount charged to a customer, the name of the merchant, and the date of the transaction - not the nature of the purchase and the amount of tax collected. Using credit and debit card companies as a mechanism for collecting and remitting sales tax would require businesses to inform them of every item purchased by a particular customer, and the intended use of those items if a use-based exemption could apply. With concerns about privacy already being raised over use tax reporting requirements, getting businesses on board with using credit and debit card processors to remit sales taxes may be a hard sell.

Continue the discussion on the BBNA State Tax Group on LinkedIn: Are taxpayers likely to accept real-time sales monitoring software or real-time sales tax remitting mechanisms? How should states balance privacy concerns with the need to ensure sales tax compliance?

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