Is Real-Time Sales Tax Collection Possible?

Posted on Feb 26, 2019

With the Wayfair ruling expanding sales tax collection obligations, your clients with customers in multiple states are exploring the viability of automated sales tax and other indirect tax calculation solutions.

Finding a way to streamline collections is key, as no one wants to keep up with this manually any longer. Automation is also key – the advanced capabilities of automated sales tax compliance tools were even mentioned by the U.S. Supreme Court in Wayfair as a mitigating factor in favor of the Court’s rollback of the somewhat vendor-friendly physical presence standard.

The mash-up of geo-locating capabilities, real-time cloud-based calculations, instantaneous applications of current rates, and multistate product and service tax determination databases are all available in microseconds via the internet, forming the essential infrastructure of modern cloud-based sales tax automation.

There is a common thread running through all these elements of a cloud-based tax calculation software solution: the speed at which these functions are accomplished is truly remarkable. In combination with modern payment processes, sales taxes are routinely calculated and paid to a vendor in less than a second in the modern e-commerce space.

The sales taxes collected on behalf of a state or other government authority are held in trust by vendors until the funds are remitted by that vendor to the state or local government. “Held” is also somewhat nebulous; in some cases, they can be held for more than 50 days, even for a fully compliant vendor filing monthly returns. Add to this the velocity of the state’s money – enduring an extreme slowdown on its path to government general funds across the country – and you come up with a frustrating process.

Instant accurate calculation, which is provided by automated sales tax solutions, is beginning to inspire revenue authorities who consider this time lag detrimental to their ability to spend the money. If we have real-time calculation and collections, why not real-time reporting and remittance? And, since the tax world needs more acronyms … here is one that might be new to some of you: RTIR, Real-Time Invoice Reporting.

Hungary Gives it a Shot

In July 2018, Hungary began to require near real-time reporting of value-added tax (VAT) for certain sale types. While the new rules only apply to entities that are registered for VAT in Hungary and to business-to-business transactions over a certain threshold, it’s easy to see a future where real-time reporting and remittance from vendors to revenue authorities becomes conventional.

How does this work? Sales data is transferred from a vendor’s accounting or ERP system to tax management software that transforms the data to the reporting schema required by the new law. This step must occur immediately after a sales invoice is issued by the ERP – human intervention in the intervening moments is a no-no. Hungary’s rules provide a 24-hour window for the remittance and reporting to be completed.

During the process, locked invoices may be submitted individually or through batches of up to 100 invoices per time. When submitting, an electronic invoice submission token will be issued to the taxpayer that is used with the upload of the batch of locked invoices.

The token is only live for approximately five minutes. Then, an electronic reference number is issued against the invoice. However, this does not need to be printed on the invoice because it is just a reference for potential future audits.

A Peek into the Future

There are plenty of issues and challenges to implementation of an RTIR regime, most of which won’t be solved by accountants and tax professionals alone. That said, some things come to mind: For the states, their investment in designing and implementing an RTIR system could greatly reduce the time lag from collection by vendors until reporting and remittance to the states.

In addition, Hungary expects its RTIR system to reduce VAT evasion, so perhaps states would make the same argument. Eventually, an RTIR system might serve to phase out the form-based compliance structure we have come to know – and despise at times.

On the other hand, an RTIR system might complicate situations such as refunds or credits, especially where rates have changed over time.

© Clark Nuber PS, 2019. All Rights Reserved

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This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

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