How to Stay Ahead of Shrinking Tax Compliance Deadlines
It was no April Fool’s joke when the Massachusetts Department of Revenue (DOR) changed the sales tax compliance requirements on April 1. As part of the Massachusetts Advance Payment Program, two big tax changes went into effect for qualifying retailers: one, the requirement to report sales tax is on an entirely different schedule from the requirement to remit sales tax and, two, the requirement to remit sales tax became extremely short, although at the last minute the Commonwealth did provide a temporary reprieve. Moreover, the rule doesn't just apply to Massachusetts' 84,000 retailers; it will also apply to any qualifying retailer in the U.S. that sells to consumers or businesses based in the Bay State.
According to the new rule, if a retailer selling to buyers in Massachusetts had more than $150,000 in cumulative tax liability in the preceding calendar year — in this case, January 2020 to December 2020 — they're required to remit under the new Advance Payment rule. Under the new rule, the retailer collects tax as usual but, on the 25th of the month, there's now an obligation to remit any tax collected between the 1st and the 21st of that same month. The accompanying sales tax returns are now due on the 30th of the month. On that return, qualifying sellers would report tax collected in the previous month and remit the tax collected from the 22nd to the end-of-month. For example, on May 30, 2021, qualifying sellers were obligated to file a tax return that reported all their April transactions and required to remit any tax collected from April 22 to April 30.
Condensed Timeline Increases Risk of Penalties
This rule, unlike most pre-payment requirements, isn't designed to be based on estimated tax liability. Rather, the DOR intends for qualifying sellers to know exactly how much tax they collected from the beginning of the month through the 21st, and remit that precise amount on the 25th. Many sellers currently don't have accounting systems and procedures that are intended to support such a requirement, and the fact is, if you estimate your collections and estimate incorrectly, material penalties apply.
Just before this new requirement came into effect, the DOR recognized that retailers may have some short-term challenges with this new and novel obligation and created a safe harbor that applies for the remainder of the 2021 calendar year. In short, the department will presume “reasonable cause” exists, and automatically waive any underpayment penalty when the Advance Payment on the 25th equals at least 80 percent of the total sales tax liability from the prior month. Whether Massachusetts may choose to extend this second safe harbor into 2022 remains to be seen. As the rules stand today, it's definitely set to expire.
The Reporting and Remittance Process for Retailers
Here’s how the safe harbor works for a retailer selling to Massachusetts residents that meet the $150,000 threshold: In the previous month, retailer X had $20,313 in sales tax liability. In the current month, it's not able to make a precise determination of its tax collections from the 1st to the 21st, so on the 25th it makes an advance payment of $16,250 using data from the previous month (80 percent of $20,313). Ultimately, retailer X understands that it made $325,000 in taxable sales during the first 21 days of the month and an additional $175,00 for the remainder of the month. Given that the standard tax rate in Massachusetts is 6.25 percent, it owes $31,250 in tax and their Advance Payment was underpaid by $4,063.
When retailer X files its return on the 30th of the next month, it reports its additional tax liability ($15,000) minus prepayment that was made previously ($20,313). Even though it remitted less than 70 percent of the tax due for the month on the 25th and could be subject to an underpayment penalty absent “reasonable cause,” the safe harbor kicks in and the penalty is automatically waived.
Preparation is the Key to Compliance
With this new requirement in place and the safe harbor set to expire, qualifying retailers selling to Massachusetts customers need to be aware of the current rules and stay abreast of future regulations — which could add a new wrinkle and a new compliance challenge at any time.
For Massachusetts, retailers should first confirm whether they’re subject to these new advanced payment requirements based on their 2020 tax remittance. And, if they are, take the necessary steps to be able to accurately make the required Advance Payment on the 25th, understanding that as soon as next year, that payment is expected to mirror actual tax collected and cannot safely be estimated based on collections in the previous month.
For now, it’s still unclear whether the Massachusetts Advanced Payment Program is on the leading edge of a new trend in real-time tax compliance or if it will be a challenging outlier. Regardless, what’s clear is that the evolution of this state program demonstrates what it takes for retailers to stay compliant in the world of modern tax. Requirements are becoming more complex and challenging. As a result, retailers have no choice but to remain constantly vigilant about the changes impacting their remittances, taking strategic actions and employing the right tools so they're prepared for whatever lies ahead.
Charles Maniace is vice president of regulatory analysis and design at Sovos, a leading global provider of software that safeguards businesses from the burden and risk of modern tax.
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Charles Maniace is the director of regulatory analysis at Sovos, a leading global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, Chuck leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos customers continually compliant. Over his 15-year career in tax and regulatory automation, Chuck has provided analysis to the WSJ, NBC, Bloomberg and more.