Why state and local governments need to future-proof their sales tax processes with technology
Just over a year ago, state and local governments were forced to address the public health crisis created by the COVID-19 pandemic. While combating the virus has been the top priority, the pandemic also had other effects on governments outside of public health strains, including the stress of relying on paper-based processes.
Across the United States, a large majority of state and local governments manage tax processes—from issuing licenses to receiving tax returns to issuing notices—in a paper-based manner. When the pandemic hit and state and local tax employees were sent home, those tax authorities faced the significant challenge of managing a tax process that was completely paper-based.
In what is becoming a digital-first society, reliance on paper-based processes is not only inefficient, but it also increases risk in the event of major disruptive events. Just as state and local authorities use technology to future-proof their electrical and water systems, they can do the same for their tax processes while driving efficiencies and maintaining operations during future disruptive events like the COVID-19 pandemic.
According to Deloitte, after the pandemic governments will need to adapt to a new reality, which includes changes to service delivery and pace of regulation. The post-pandemic era will be one of more technology adoption at the state and local level to enable a government work environment that is more flexible, agile and prepared for continuity in the face of disruption—tax will be no exception.
But what do state and local governments need to do to future-proof their tax processes with technology moving forward? To effectively future-proof their processes, tax authorities must embrace technology that eases interoperability and seamless data exchange, creates the ability to work securely in a real-time environment, and scales from a single operator to large, enterprise businesses. A successful effort will be technology that creates trust and closes the gap between themselves and businesses.
Here are three ways adopting standard tax technology can benefit state and local governments moving forward:
Modernizing with electronic registrations and filing
While e-filing is a common process among state governments, it is not among local governments even though that technology can help streamline tax registrations and collections. Today, even when digital formats are used for tax registration and returns, the process can be time-consuming and cumbersome for businesses—and it’s likely to only increase in complexity for businesses and authorities as ecommerce continues to expand.
The pandemic drastically increased the use of ecommerce, and a 2020 survey of businesses found that the majority of businesses are aware of remote sales tax laws, but less than half report being fully compliant. When authorities get those businesses in compliance, it will mean a deluge of net-new sales tax returns filed by businesses, increasing pressure on existing systems and processes which are too often paper based.
Simplifying the process using trusted data sources
Governments and businesses leveraging the same technology would save enormous time and resources but everyone using the same software is an unlikely outcome. What is more likely is the use of common standards that can simplify processes for governments and businesses.
Points of friction can be reduced by creating trusted relationships that limit the need for auditing and validation—all while ensuring tax authorities are receiving the most accurate tax collections each time. Trust starts with all parties operating from an agreement on the rules—increasing transparency and compliance from the very beginning.
Those shared standards become the data that powers the platform that effectively becomes a centralized source of truth for businesses and governments alike. The result is that businesses need not worry about tax calculations being correct and governments can be confident in the accuracy of their collections.
Automating the exchange of tax information
Governments and the tax industry have long worked together to standardize and encourage the electronic exchange of tax information. However, as more transactions take place online and governments look to decrease tax fraud, the time between a transaction and tax remittance will inevitably become less and less. As governments look to cut down the time between transaction and remittance, it will require greater efficiencies from the financial systems government and businesses must rely upon. Technology integration between governments and business will help shorten the time between transactions and collections. Doing that will help tax authorities minimize fraud and will assist business, reducing the potential for business to make errors.
Some states, like Massachusetts, are already working to close the time between transactions and tax collections. Beginning April 1, 2021, certain Massachusetts taxpayers with more than $150,000 in cumulative tax liability for the immediately preceding calendar year became subject to advance payment requirements by the 25th of the same month. Massachusetts’ governor wanted a second phase that would require all retailers and credit card processors to capture sales tax at the time of purchase.
To make something like Phase 2 a reality would take a significant investment in connecting the various technology systems used across businesses, governments and payment processors. For daily tax remittance to happen, tax authorities must be able to capture tax information more easily and seamlessly from businesses in close to real-time.
The concept of integrating tax technology between business and government doesn’t apply to just certain aspects of the tax compliance journey, like returns. Integrating tax technology could instantaneously issue a license to a business, automatically enabling a business to begin collecting sales tax. The same instantaneous management scenario applies to all business to government interaction, such as exemption certificates and tax document management.
As more commerce takes place digitally, state and local governments will need to modernize their tax processes to keep pace. Authorities should take a forward-looking approach to exploring tax technology so that they can address the issues of today and tomorrow. There is ample opportunity for state and local governments to enlist the help of technology that is already being used by businesses to manage their tax obligations.
The future of tax compliance is one that prioritizes efficiency and operates on a centralized and openly available technology to readily exchange data to instill trust in all stakeholders. To make this a reality, governments and businesses will need to integrate their tax technology to reduce the need to connect disparate systems, reduce complexity, and increase compliance.
Liz Armbruester oversees global compliance operations at Avalara. With more than 20 years of leadership experience from a variety of technology sectors including software, media and services, Armbruester is known for her strong track record of innovative problem solving, process optimization, and the ability to deliver automation for efficiency and scale.
Scott Peterson currently serves as the vice president of U.S. tax policy for Avalara. Peterson was the first executive director of the Streamlined Sales Tax Governing Board. As its COO, Peterson helped that organization make sales tax simpler and more uniform. Prior to that he spent 10 years as director of the South Dakota Sales Tax Division and 12 years providing tax policy research and legislative drafting for the South Dakota Legislature. He’s now Avalara’s go-to resource for all things related to tax policy.