Accounting
Black Friday stress-tests sales tax solutions\
David Paul Morris/Bloomberg
While shoppers that took Black Friday seriously now have an opportunity to rest from their efforts before venturing back out to the malls, tax professionals who are responsible for businesses’ sales taxes may find it hard to keep up with the demands of the holiday season.
“The complexity during Black Friday, Small Business Saturday, and Cyber Monday into the holiday season is due to the serious uptick in transactions that happen during the holiday time,” said Charles Maniace, vice president of regulatory analysis & design at indirect tax software solution provider Sovos. “The way I always view it is that it’s kind of a crucible in which a retailer’s tax systems and processes are put to their maximum test if there is a weakness. If there’s a weakness or vulnerability, it’s going to be revealed and become a problem during the holiday.”
“For example, let’s say your organization doesn’t apply a solution that’s particularly on top of rate and rule and requirement changes,” he continued. “It’s during this time where you’ll be processing for some companies that process the majority of their sales during the holiday. So if you’re going to get taxed wrong because you don’t know that a rate or a rule has changed in a given jurisdiction, the effect of not having the right answer will more robustly be manifest when you’re making your most sales. Of course, this creates potentially a customer service problem: The last thing you need during the holiday season is people flooding your customer support line with questions about why you’re applying incorrect sales tax. It’s a customer service disaster. And it creates the greatest audit exposure because that’s where the highest volume is.”
“People are buying a large volume of goods at this time, and if a retailer is applying the wrong tax rate, it’s a recipe for a future audit liability that’s going to sit on your books for a couple of years until the auditors come knocking and then it will reveal itself in a very painful way,” said Maniace. “The other issue is scalability and whether your solution can handle the increased volume. If you have an automated solution, is that solution capable of supporting you in your most challenging time? Can it handle the increased volume without doing something incorrect or inaccurate?”
There is also a potential issue with the interplay with economic nexus, according to Maniace.
“There’s still a whole bunch of states, including California, that say your obligation to collect and remit sales tax occurs during the next transaction after you cross an economic nexus threshold,” he explained. “For smaller sellers, it means that if they experience a holiday spike, if they cross the threshold during the holiday, then they become obligated to collect and remit sales and use tax on the next sale. So let’s say a state has a $100,000-in-gross-sales threshold, and they cross that threshold after Black Friday but before Cyber Monday. Technically they have an obligation to collect and remit a tax on Cyber Monday.”
The only way a company can turn around on a dime and go from being not compliant to being compliant is by having a solution in place that allows you to effectively turn on your compliance with the flip of a switch or a phone call, Maniace observed.
“You have to be able to work with your provider on an immediate basis, flip a couple of switches in your solution, and start collecting and remitting on a timely manner,” he said. “This is where technology providers prove their mettle — are they truly up all of the time, and will that uptime persist when all of their clients are pinging the system for transactions that are happening in real time.”
Retail delivery fees: The next big trend?
Colorado introduced a retail delivery fee several years ago, and Minnesota followed with their own version in July 2024. Maniace foresees other states developing their such a fee in coming years, with each one differing from the other.
“It’s a 50 cent fee applied to orders over $100 that include either a taxable item or non-taxable clothing,” he explained. “There’s a mechanism in Minnesota law that allows a seller to either pass this on to their customer directly as a charge on their invoice or absorb the cost. A seller may choose to absorb that cost and that may work for them for a period of a few months, but when they do that it comes out of their bottom line. Unless they’re overtly raising their costs to account for something like the retail delivery fee, it’s coming out of their profits. It’s a relatively recent law change and if you haven’t adopted it or accounted for it on an automated basis, it’s going to really cut into your profits come this Christmas.”
“A number of other states have expressed interest in it,” he noted. “Washington commissioned a study on it, and Nebraska considered it in their last special session, but ultimately chose not to adopt it. I suspect that this coming legislative session, and future ones, we could see a number of other states adopting something like the retail delivery fee. When you pyramid one on top of another, with each one working differently, you’re adding a great deal of complexity.”
The House unanimously passed four bipartisan bills Tuesday concerning taxes and the Internal Revenue Service that were all
- H.R. 1152, the Electronic Filing and Payment Fairness Act, sponsored by Rep. Darin LaHood, R-Illinois, Suzan Delbene, D-Washington, Randy Feenstra, R-Iowa, Brad Schneider, D-Illinois, Brian Fitzpatrick, R-Pennsylvania and Jimmy Panetta, D-California. The bill would apply the “mailbox rule” to electronically submitted tax returns and payments to allow the IRS to record payments and documents submitted to the IRS electronically on the day the payments or documents are submitted instead of when they are received or reviewed at a later date. The AICPA believes this would offer clarity and simplification to the payment and document submission process while protecting taxpayers from undue penalties.
- H.R. 998, the Internal Revenue Service Math and Taxpayer Help Act, sponsored by Rep. Randy Feenstra, R-Iowa, and Brad Schneider, D-Illinois, which would require notices describing a mathematical or clerical error to be made in plain language, and require the Treasury to provide additional procedures for requesting an abatement of a math or clerical error adjustment, including by telephone or in person, among other provisions.
- H.R. 517, the Filing Relief for Natural Disasters Act, sponsored by Rep. David Kustoff, R-Tennessee, and Judy Chu, D-California. The process of receiving tax relief from the IRS following a natural disaster typically must follow a federal disaster declaration, which can often come weeks after a state disaster declaration. The bill would provide the IRS with authority to grant tax relief once the governor of a state declares either a disaster or a state of emergency and expand the mandatory federal filing extension under Section 7508(d) of the Tax Code from 60 days to 120 days, providing taxpayers with more time to file tax returns after a disaster.
- H.R. 1491, the Disaster related Extension of Deadlines Act, sponsored by Rep. Gregory Murphy, R-North Carolina, and Jimmy Panetta, D-California, would extend the amount of time disaster victims would have to file for a tax refund or credit (i.e., the lookback period) by the amount of time afforded pursuant to a disaster relief postponement period for taxpayers affected by major disasters. This legislative solution would place taxpayers on equal footing as taxpayers not impacted by major disasters and would afford greater clarity and certainty to taxpayers and tax practitioners regarding this lookback period.
“The AICPA has long supported these proposals and will continue to work to advance comprehensive legislation that enhances IRS operations and improves the taxpayer experience,” said Melanie Lauridsen, vice president of tax policy and advocacy for the AICPA, in a statement Tuesday. “We are pleased to work closely with each of these Representatives on common-sense reforms that will benefit taxpayers, tax practitioners and tax administration and we’re encouraged by their passage in the House. We look forward to continuing to work with Congress to improve the taxpayer experience.”
The bills were also included in a recent Senate
The House also passed two other tax-related bills Tuesday that weren’t endorsed in the recent AICPA letter.
- H.R. 1155, Recovery of Stolen Checks Act, sponsored by Rep. Nicole Malliotakis, R-New York, would require the IRS to create a process for taxpayers to request a replacement via direct deposit for a stolen paper check. If a check is determined to be stolen or lost, and not cashed, a taxpayer will receive a replacement check once the original check is cancelled, but many taxpayers are having their replacement checks stolen as well. Taxpayers who have a check stolen are then unable to request that the replacement check be sent via direct deposit. The bill would require the Treasury to establish processes and procedures under which taxpayers, who are otherwise eligible to receive an amount by paper check in replacement of a lost or stolen paper check, may elect to receive such amount by direct deposit.
- H.R. 997, National Taxpayer Advocate Enhancement Act, sponsored by Rep. Randy Feenstra, R-Iowa, would prevent IRS interference with National Taxpayer Advocate personnel by granting the NTA responsibility for its attorneys. In advocating for taxpayer rights, the National Taxpayer Advocate often requires independent legal advice. But currently, the staff members hired by the National Taxpayer Advocate are accountable to internal IRS counsel, not the Taxpayer Advocate, creating a potential conflict of interest to the detriment of taxpayers. The bill would authorize the National Taxpayer Advocate to hire attorneys who report directly to her, helping establish independence from the IRS.
House Ways and Means Committee Chairman Jason Smith, R-Missouri, applauded the bipartisan House passage of the various bills, which had been unanimously passed by the committee.
“President Trump was elected on the promise of finally making the government work better for working people,” Smith said in a statement Tuesday. “This bipartisan legislation helps fulfill that mandate and makes improvements to tax administration that will make it easier for the American people to file their taxes. Those who are rebuilding after a natural disaster particularly need help filing taxes, which is why this set of bills lightens the load for taxpayers in communities struck by a hurricane, tornado or some other disaster. With Tax Day just a few days away, we must look for common-sense, bipartisan ways to make filing taxes less of a hassle.”
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