It was no April Idiot’s joke when the Massachusetts Division of Income (DOR) modified the gross sales tax compliance necessities on April 1. As a part of the Massachusetts Advance Fee Program, two massive tax modifications went into impact for qualifying retailers: one, the requirement to report gross sales tax is on a completely totally different schedule from the requirement to remit gross sales tax and, two, the requirement to remit gross sales tax turned extraordinarily quick, though on the final minute the Commonwealth did present a brief reprieve. Furthermore, the rule would not simply apply to Massachusetts’ 84,000 retailers; it would additionally apply to any qualifying retailer within the U.S. that sells to customers or companies based mostly within the Bay State.
In accordance with the brand new rule, if a retailer promoting to consumers in Massachusetts had more than $150,000 in cumulative tax liability within the previous calendar yr — on this case, January 2020 to December 2020 — they’re required to remit below the brand new Advance Fee rule. Underneath the brand new rule, the retailer collects tax as ordinary however, on the twenty fifth of the month, there’s now an obligation to remit any tax collected between the first and the twenty first of that very same month. The accompanying gross sales tax returns are actually due on the thirtieth of the month. On that return, qualifying sellers would report tax collected within the earlier month and remit the tax collected from the twenty second to the end-of-month. For instance, on Could 30, 2021, qualifying sellers have been 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 Will increase Danger of Penalties
This rule, not like most pre-payment necessities, is not designed to be based mostly on estimated tax legal responsibility. Fairly, the DOR intends for qualifying sellers to know precisely how a lot tax they collected from the start of the month by the twenty first, and remit that exact quantity on the twenty fifth. Many sellers presently haven’t got accounting programs and procedures which can be supposed to assist such a requirement, and the very fact is, should you estimate your collections and estimate incorrectly, materials penalties apply.
Simply earlier than this new requirement got here into impact, the DOR acknowledged that retailers might have some short-term challenges with this new and novel obligation and created a protected harbor that applies for the rest of the 2021 calendar yr. Briefly, the division will presume “affordable trigger” exists, and routinely waive any underpayment penalty when the Advance Fee on the twenty fifth equals not less than 80 p.c of the full gross sales tax legal responsibility from the prior month. Whether or not Massachusetts might select to increase this second protected harbor into 2022 stays to be seen. As the principles stand right this moment, it is undoubtedly set to run out.
The Reporting and Remittance Course of for Retailers
Right here’s how the protected harbor works for a retailer promoting to Massachusetts residents that meet the $150,000 threshold: Within the earlier month, retailer X had $20,313 in gross sales tax legal responsibility. Within the present month, it is not in a position to make a exact dedication of its tax collections from the first to the twenty first, so on the twenty fifth it makes an advance cost of $16,250 utilizing information from the earlier month (80 p.c of $20,313). Finally, retailer X understands that it made $325,000 in taxable gross sales through the first 21 days of the month and an extra $175,00 for the rest of the month. Provided that the usual tax charge in Massachusetts is 6.25 p.c, it owes $31,250 in tax and their Advance Fee was underpaid by $4,063.
When retailer X information its return on the thirtieth of the subsequent month, it reviews its extra tax legal responsibility ($15,000) minus prepayment that was made beforehand ($20,313). Although it remitted lower than 70 p.c of the tax due for the month on the twenty fifth and might be topic to an underpayment penalty absent “affordable trigger,” the protected harbor kicks in and the penalty is routinely waived.
Preparation is the Key to Compliance
With this new requirement in place and the protected harbor set to run out, qualifying retailers promoting to Massachusetts prospects want to pay attention to the present guidelines and keep abreast of future rules — which may add a brand new wrinkle and a brand new compliance problem at any time.
For Massachusetts, retailers ought to first verify whether or not they’re topic to those new superior cost necessities based mostly on their 2020 tax remittance. And, if they’re, take the required steps to have the ability to precisely make the required Advance Fee on the twenty fifth, understanding that as quickly as subsequent yr, that cost is predicted to reflect precise tax collected and can’t safely be estimated based mostly on collections within the earlier month.
For now, it’s nonetheless unclear whether or not the Massachusetts Superior Fee Program is on the forefront of a brand new development in real-time tax compliance or if it will likely be a difficult outlier. Regardless, what’s clear is that the evolution of this state program demonstrates what it takes for retailers to remain compliant on this planet of recent tax. Necessities have gotten extra advanced and difficult. Because of this, retailers haven’t any selection however to stay continuously vigilant concerning the modifications impacting their remittances, taking strategic actions and using the precise instruments in order that they’re ready for no matter lies forward.
Charles Maniace is vp of regulatory evaluation and design at Sovos, a number one international supplier of software program that safeguards companies from the burden and danger of recent tax.