The False Promise of “Real Time” Sales Tax Remittance
March 20, 2017 by Bill Rennie
Much has been said and written about Governor Baker’s $300 million employer Medicaid tax proposal, which when fully annualized over the course of the year projects out to more than a $600 million tax increase on employers, and rightly so, as that is a big number. Less attention has been paid to another proposal in the budget that is also meant to generate significant revenue from employers by adopting what the Governor describes as a “Sales Tax Modernization Timing Change,” more commonly referred to as “real-time” sales tax collection. The Administration counts on this change to bring in $125 million in the next fiscal year – another big number. However, like the proposed Medicaid tax, the “real-time” proposal is flawed.
This sales tax timing change, included in Section 34 of the Governor’s FY18 budget, would require third party payment processors to collect and remit sales tax from retailers in real time, on all third party credit and debit card purchases. Currently, retailers collect and remit all sales tax to the state, and they are responsible for the accuracy, reconciliation and auditing of their payments and accounts. That process would continue under this proposal for all purchases made not using a third party credit or debit card, such as purchases made using cash, gift cards, checks, store brand cards, and split tender transactions.
However, a second payment system would need to be built to accommodate the state’s “real-time” collection and remittance process. Retailers, credit card companies, processors and even the state Department of Revenue would incur millions of dollars in new expenses to build out and maintain this new system – costs that would be passed onto consumers and taxpayers. For what? No “new” revenue is generated. You’re just grabbing sales tax a month early, in what amounts to be a one month’s advance in your allowance. How? The Administration proposes for this section to take effect on June 1, 2018 – one month prior to the end of the FY18 fiscal year. In doing so, the state would grab the sales tax due in July one month earlier, moving the funds from FY19 back into FY18. It’s a budget gimmick that only works once, because then you’d be on a forward schedule – but you’d also have created yourself a new hole in the FY19 budget.
Also, there will be costly fees that will be associated with the processing costs of this new network. Or do we assume that the credit card and processing companies are going to do this for free? Retailers have served as the state’s tax collectors since 1966 and they receive no compensation for providing that service. Meanwhile, 28 out of the 45 states that have a sales tax do compensate their sales tax collectors – retailers and restaurants – via some form of a vendor discount or collection allowance. We simply cannot ask our local sellers to fund two collection processes which will not net the state any additional new revenue.
“Real-time” sales tax collection does not exist in any form in any state. The National Conference of State Legislatures’ (NCSL) Executive Committee on State and Local Taxation reviewed this issue for a year and concluded that this was not a process to be recommended to the states and that “the purported “real time” sales tax process is not a solution.” The Commissioner of the Revenue Department in Connecticut, Kevin Sullivan, testified last year that this was “a solution in search of a problem, or at least it’s the wrong solution.”
The Administration has repeatedly highlighted the fact that in just two short years, they have proposed to reduce the state’s reliance on the use of one-time revenue in the budget from $1.2 billion to just under $100 million, and achieved a near structural balance. Unfortunately, they’ve proposed to get there in this budget on the backs of retailers and employers with dubious proposals like this one, and hundreds of millions of dollars in new employer taxes.
The Legislature would be wise to discard this potentially costly and unproven proposal.