Why Faster, Digital-Driven Payments Open the Door to New Compliance Burdens
Technology has benefited retailers in innumerable ways, from automating accounting and streamlining logistics and checkout to improving customer relationships. In addition, faster payment technologies would seem to offer many benefits with little downside – the faster a retailer receives funds, the better. But governments around the world have also taken note of these technologies and are thinking about ways to use them, not only to reduce fraud, but also to collect the taxes due to them faster.
Tax compliance has always been an inevitable part of business, but this new trend will likely add more pressure onto retailers, and companies should begin thinking about how they will prepare for it and update their systems to adapt.
A Look at Global Governments
Rapid tax collection is already a global reality. For example, under Brazil’s new tax regime, most B2B invoices must be sent to the government electronically in real time and signed by the government before the sale can be legally completed. Then at the time of return-filing, businesses must upload their full accounting records including general ledgers, trial balances, customer list, inventory transfer record, supplier list, and other ledgers to a public digital bookkeeping system called SPED. The government then matches these transactions between buyers and sellers and notifies or audits parties if they have missing transactions.
In India, the Goods and Services Tax Network (GSTN), though not a real-time system, enables the government to reconcile transactions between buyers and sellers. GSTN requires sellers to upload full invoice-level details for all business-to-consumer transactions that are greater than 250,000 Rupees (approximately U.S.$3,900). Businesses must also provide extensive payment details and identify the HSN code for all products. In the Indian system, the government prepares your tax return for you based on information they have already collected from those you do business with.
It is not hard to imagine that the U.S. will look to catch up as states scramble for additional revenue. Already, there is a Colorado law that requires out-of-state sellers that don’t collect local sales tax to provide the state with a list of all customers and purchases for sales in Colorado. Most Americans would be shocked to know the government is getting a list of everything they buy – however the Supreme Court recently declined to review this law, letting it stand. Many states are copying Colorado’s lead as in other areas, most merchants participate in the Streamlined Sales Tax initiative must provide ledger-level details in their tax filing.
Getting Ready for Change
Though it’s not yet clear which other states (and countries) will enact new laws and what impacts they will have on payments, more changes are certainly coming. The sooner retailers begin planning for them, the less disruption and uncertainty they will experience – and this is especially true for small and medium-sized businesses. Large businesses can more easily absorb the cost of system upgrades and recover from process disruption, but SMBs should be thinking about how to turn the changes into an opportunity – or at least minimize the negative impact.
Below are the top three items to consider when it comes to preparing for changing payment laws and regulations.
1.Vet your payment provider’s capabilities.
Payment providers will likely need to make significant system upgrades to adapt to changing sales tax laws. For example, they will need to be able to split money collected during a payment and send part of it back to the retailer while forwarding the tax portion to the state government. Retailers using a service to automatically calculate sales tax will also need to make sure the service provider can calculate sales tax in real time and offer pre-built integrations for sending this information to the state government.
- Understand the impact on accounting.
Accounting departments will need to update their systems to be able to receive funds from the payment provider on a daily basis and reconcile what the provider has forwarded to the state government against the actual tax obligation. In the future when filing returns, you will deduct these prepaid amounts from your remittance due. Thus, accounting departments must track who is paying taxes on their behalf, accrue that against a taxes payable liability, and ultimately report those amounts on returns.
- Prepare for the end of the float.
An unwelcome impact of faster payments systems is the likely end of the sales tax float. Today, retailers collect sales tax from customers at the time of purchase but do not need to forward this money to the state for up to several weeks. During this time, they can use the money in a variety of ways. Depending on the size of the business and the amount collected, the money can collect interest, be used to purchase additional inventory or for other investments.
Retailers who rely on this float must start thinking about how they will change their processes when the float disappears. Will it require building a larger cash reserve, and should this process start right away? Will retailers need to adjust the frequency of ordering new product or amend contracts with suppliers?
Preparing for the inevitable changes to regulations will require foresight, research and investment. It is vital that businesses think about the possibilities ahead of time – a retailer that waits until the last minute will only create more disruption and financial pain. With planning and strategic thinking, retailers in the face of change will be able to build a stronger and more efficient business.
About the Author
Peter Horadan leads software development and operations at Avalara. His extensive background includes leadership positions in engineering, operations, and client services. In addition to building and operating SAAS services, Peter has a long history of creating industry-leading commercial software products. Before joining Avalara, Peter served as a technology executive for several private and publicly traded companies, most recently Scout Analytics. Additionally, he has directed research and development at Concur Technologies, and has held leadership roles at Microsoft, Corillian, and BEA Systems.