States have been eager to begin collecting revenue from transactions that previously went untaxed, such as sales by remote retailers, since the Supreme Court’s June 21 ruling in South Dakota v. Wayfair, Inc. obliterated the physical presence requirement for sales tax nexus. However, a major hurdle remains for state taxing authorities: figuring out which businesses are making untaxed sales. While states have traditionally relied on audits to determine whether taxpayers were complying with their sales tax collection and remittance obligations, this approach requires the state to know who is making potentially taxable sales. Because online sales offer relative anonymity to retailers, making these determinations simply hasn’t been possible until recently.
Some states are turning to big data to close this knowledge gap. The Indiana Department of Revenue has contracted with Verus Analytics, LLC to track down businesses making remote sales into the state, as Bloomberg Tax reports. Verus uses credit card information and other data to track the sales volume of remote retailers. This provides the department vital information for finding retailers that should be registering for sales tax collection under the state’s economic nexus statute.
Verus additionally offers data to assist in discovering in-state merchants that are underreporting sales or otherwise evading their sales tax obligations. The company even claims to be able to identify individual consumers who make significant online purchases, allowing authorities to enforce the payment of consumer use tax (which typically goes unpaid about 98 percent of the time).
All this could add up to big money for state and local governments. Verus estimates that nationwide, $103 billion in sales tax revenue currently goes uncollected. Although this figure is controversial (the National Conference of State Legislatures estimated $23 billion in revenue went uncollected in 2012), it is clear that states are currently leaving money on the table. Data analytics have the potential to reduce the number of sales for which tax goes uncollected in the United States.
Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: What are the potential problems for both states and retailers with using these kinds of data analytics to collect sales and use tax?
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