United States: How Technology Is Changing The Landscape Of Taxation In America

Technological advances, particularly in the areas of online commerce and cloud solutions, have forever changed how business is conducted in the U.S. and abroad. Because of these developments, Corporate America has made quantum leaps in the use of technology to streamline processes, improve efficiencies and minimize costs.

Good News, Bad News

The digital revolution has been helping drive business growth by providing insights and options that were not available just a few years ago. We can now analyze enormous amounts of data to better inform decisions and more quickly accomplish business goals. In many ways, compliance costs have merely been shifted from human capital to technology, but accuracy has been vastly improved by the use of technology. For small and mid-sized businesses, it is often more affordable to outsource the compliance function than to employ the tools necessary to comply with filing requirements.

Finance and tax departments across the country have enthusiastically embraced technology to ensure that compliance functions operate quicker and better than in years past. This is particularly the case in the areas of sales and use tax and unclaimed property compliance. Despite these advances, state and local governments and the administrators charged with executing the laws of the land are often stuck in a time warp thwarting the efforts of corporations to realize many of the benefits that these technological advances can deliver.

There are numerous examples where technology has materially altered the world of corporate taxation, but none more evident than those resulting from last year's Wayfair Supreme Court decision. This past year, the Supreme Court in Wayfair threw prior precedence to the wind that previously only required sellers of goods or services to collect and remit sales tax if they maintained a physical presence in the state. Post Wayfair, states have broader authority to require companies to collect tax merely as a result of promoting goods or services for sale into a state. Thus, replacing the "physical" presence with a far less "economic" presence standard as the threshold for collecting tax.

Consequently, the majority of states have issued rules requiring all companies that exceed certain thresholds to collect and remit sales tax. The Supreme Court justices noted in Wayfair that software already exists to easily implement these new economic presence requirements. Yet, upon closer examination, failure by the states to adequately define which activities are subject to tax, as well as lack of conformity among the states, has created enormous inefficiencies and disrupted the ability of companies to deploy technology to comply with the changing landscape.

Current tax laws are based primarily on outdated notions of sales and use of tangible personal property between a retailer and a customer. Few states have uniform rules for the explicit treatment of web-based sales of both goods and services. Consequently, many states are trying to tax web-based service offerings as if they were the rental of tangible personal property. This is indicative of how archaic some tax laws are in relation to the technological advances most of us consider to be standard in today's economy.

While states have been quick to pass rules requiring companies to rapidly collect and remit tax, they have been slower to conform the tax laws to the current economy. The lack of conformity among the states has further exasperated the ability of companies to implement broad-based enterprise solutions.

In the unclaimed property arena, states have slowly begun adoption of the 2016 Revised Uniform Unclaimed Property Act (RUUPA), which is the third attempt by unclaimed property administrators at uniformity over the past 30 years. So far, six states have adopted acts based on RUUPA.

At the moment, lack of uniformity plagues corporate filers, with some states requiring electronic filing and payment, some requiring paper reports and checks and others requiring transmission of an encrypted diskette. Universally, states mandate filers use "snail mail" to an almost certainly bad address, as the required method of due diligence notification. RUUPA allows for electronic notification, which should greatly enhance the intent of the law: to reunite funds with true owners. Additionally, 20 states have purchased a uniform compliance software platform which will allow corporate filers some much needed consistency.

Finally, technological developments have inevitably led to new property types that companies must consider, and that the states must decide how to treat. Virtual and digital currency, bitcoins and the like, are specifically mentioned in RUUPA. However, no real guidance is provided on how to treat this new property type. Who is the owner? How can this be remitted to the states with the "encryption key"? Virtual wallets are a major issue now that the states have taken steps to address them. More and more people are conducting online transactions using virtual wallets with retail and resale platforms. Often, these wallets are set to pay a seller only after a certain dollar amount has accumulated. Frequently, owners ignore smaller dollar amounts that don't meet the payment threshold, and don't provide addresses when signing up. The states are now enforcing collection/compliance in this area as they search for new sources of revenue. Corporations who conduct these types of transactions would be well-served to address this issue proactively, either through remediation or planning opportunities.

While software solutions for sales and use tax can make it easier to collect and remit taxes in hundreds of state and local jurisdictions, determining the taxability of services rendered via the internet – whether classified as information services, data processing, credit reporting or software as a service (SaaS) – can be particularly challenging. As an indicator of the confusion, some states that initially ruled electronically transmitted information would not be considered tangible personal property subject to sales and use tax have gone on to revoke those original rulings, some states have issued refund claims on behalf of customers, essentially issuing refunds for taxes paid on services even though state policy mandated the purchases be subject to tax. Another illogical issue facing businesses is accessing information via the cloud. Is it a software license, SaaS, information service or something else? One example is when Pennsylvania determined that accessing information via the internet was a software license which is taxed as if you purchased software on a disk. Using an online research tool to determine if the service is taxable is itself a taxable event.

What to Consider Moving Forward

With constantly advancing technologies and swirling tax reform initiatives, if companies want to remain viable in the Digital Age, they must be capable of adapting to rapidly evolving taxation environments. Software applications can help, but no software can correctly source and properly tax all transactions in today's climate. Businesses may want to consider whether to outsource or co-source some taxation functions where internal resources are inadequate, and address the following proactively:

  • Complying with digital requirements relating to collecting and reporting unclaimed property, and how states accept filings and reunite property with owners;
  • Automating the processes that query, pull and send stale dated records from disparate systems (accounts payable, accounts receivable credits, payroll, corporate stock, rebates, gift cards, bank accounts) and aggregate the data;
  • Understanding how states are treating new property types such as digital and virtual currency, bitcoin and various reward programs;
  • Complying with record retention requirements for online activities that support transaction detail during an audit and for other reporting purposes;
  • Adapting to new requirements for revenue sourcing, invoicing and appropriate line item billing to support all applicable jurisdictions; and
  • Keeping up with ever-changing state and local sales and use tax rates.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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