Massachusetts weighs sales-tax system tweaks for faster revenue snare
Massachusetts Gov. Charlie Baker’s sales-tax modernization plan, with some tweaks, could steer money to the commonwealth more quickly during the COVID-19 pandemic, a Boston think tank said.
“Commonly used technology makes it possible for businesses to remit the sales taxes they owe more quickly without having to adopt expensive new systems,” said Greg Sullivan, research director for Pioneer Institute and a former state inspector general.
“This would allow the commonwealth to collect much-needed interest on the funds.”
Sullivan and Andrew Mikula, a Pioneer economic opportunity fellow, co-authored "As COVID-19 Pandemic Spurs Consumer Shift to E-Commerce, the Massachusetts Sales Tax Collection System Deserves Renewed Scrutiny."
Social distancing measures and the closing of non-essential businesses, which officials deemed necessary to control the spread of COVID-19, caused retail sales to plummet nationwide. Revenue losses and balanced-budget requirements pose a double whammy for states as the fiscal year nears its end.
The Massachusetts Department of Revenue reported that for the fiscal year-to-date through May, revenue collections totaled $24.782 billion, $1.726 billion or 6.5% less than the same fiscal year-to-date period in 2019, and $2.253 billion or 8.3% less than the year-to-date benchmark.
“For states that piggyback on the federal income-tax deadline, they’re looking at a substantial portion of the receipts not coming in until past this current fiscal year,” University of Delaware public policy professor Dan Smith said Thursday on a Volcker Alliance webcast.
A two-phase proposal Baker included in his January budget submission aimed to streamline state sales tax collections. Taxes owed would flow directly to the state Department of Revenue instead of first going to the merchant.
Opponents of the plan argue that implementing the plan would require one-time costs of $1.2 billion, including $418 million for retailers, $99 million for telecommunications providers and $700 million for payment processors. They estimated $28 million in recurring annual costs.
Supporters counter that the cost to retailers would be minimal, since no hardware changes would be necessary to replace existing point-of-sale card reading devices and that costs to other parties would be far less than opponents claim.
Under the first phase, similar what Baker has previously pitched lawmakers, businesses with at least $100,000 in sales or room occupancy and meals tax collections — only 10% of state businesses meet the threshold but account for 90% of sales tax revenue — would remit taxes from the first three weeks of each month in the final week of that month.
The final week's remittance and reconciliation of any discrepancy would occur the following month.
"Phase one of Gov. Baker's proposal, for advance payment, makes sense and is entirely feasible," Sullivan and Mikula wrote.
Nineteen states have adopted the practice, according to Pioneer.
The second part of Baker’s plan would take effect in mid-2023 and require all retailers and credit card processors to capture sales tax from electronic transactions at the moment of purchase and remit daily.
Sullivan and Mikula recommended a scaled-down adoption of the second phase, arguing that it should only apply to businesses with annual sales of at least $10 million or more. This approach, they said, would allow the commonwealth to determine how well direct payments from third-party processes to Department of Revenue work before determining if it makes sense to expand the practice.
The House of Representatives and Senate would typically be hashing out the difference between their budget bills by now. Instead, amid the pandemic, neither branch has surfaced a budget plan with a July 1 deadline looming.