Penny’s Death Should Drive States to Revamp Sales Tax Systems

The penny is dead—kind of. The US Mint churned out its last one-cent piece in Philadelphia last month, though given that roughly 300 billion pennies remain in circulation, the old copper coins are unlikely to disappear anytime soon.

Sunsetting the penny has created a rounding mess for retailers who soon will have to round totals to the nearest nickel. States should take this as an opportunity to modernize sales tax policy through e-invoicing and real-time enforcement—finally bringing point-of-sale systems into the 21st century.

Ad-hoc fixes to post-penny rounding would lead to complications. Merchants could round the after-sales tax total, but who would bear the loss? If merchants round just the tax, should the state absorb the difference or should the retailer remit more than was collected?

Uniformity is another issue. Cash transactions need rounding, but credit transactions don’t. In states with strict remittance rules or consumer protection laws that prohibit price discrimination based on payment method, there are no easy answers.

Without clear guidance, millions of retailers may start interpreting state tax law on their own terms, creating serious consequences for tax revenue and enforcement.

The legal ambiguity of rounding is especially acute when retailers round the tax instead of the total. This can cause one customer buying an item to pay a rounded-down tax in cash, while another pays the full amount by card for the same item. It effectively creates a higher tax burden on electronic transactions and a tacit incentive for customers to use cash, which isn’t the result state lawmakers would hope for.

Digital transactions are easier to audit and more challenging for sales tax fraud schemes to crack. Any discriminatory treatment against electronic payment options risks running afoul of the Internet Tax Freedom Act.

Even the safer option, rounding only the total, doesn’t eliminate risk. States following the Streamlined Sales Tax Project require merchants to calculate sales tax to the third decimal point and then round only once, to the nearest penny. A work group under the project once advised states to avoid any rounding method that would appear to enrich the states at consumers’ expense.

That means the death of the penny is forcing businesses into an administrative and legal dilemma of whether to violate best practices, the tax code, or consumer law, or absorb the rounding loss themselves.

The core problem is confusion over how to round, when to round, and how to report it clearly. The solution is to bake clarity into the point-of-sale system. That means digitizing every transaction, including cash.

Rounding rules and tax calculation all should be encoded in transactions themselves and taken out of retailers’ hands entirely.

Photographer: Matthew Hatcher/Getty Images

By mandating e-invoicing across the board, states can create a reliable and standardized digital trail for every sale. This can include state-sanctioned tax calculation, rounding adjustments, and recorded details about payment method. The system would capture the transaction, plus codify how and when compliance happens. Sales tax rate changes could be made centrally, without involving retailers.

Good documentation on the merchant side and automated compliance aren’t enough. To make this effort stickier, states should pair their e-invoicing mandate with a receipt lottery system in which customers can scan receipts through a mobile app for entry into a state-run lottery. Similar systems have worked in Brazil, Rwanda, and China.

What may seem like a gimmick is a compelling compliance tool. Customers become disaggregated transaction watchdogs, motivated to demand receipts and report them to the tax administration. This ensures a transaction is reported and tracked by the retailer, and all the details on the retailer’s invoice match those on the customer’s.

For states, combining mandatory e-invoices with lotteries would do three things at once:

• Ensure the e-invoices or receipts are issued in the first place, which is critical when rounding rules affect what customers pay
• Provide a bottom-up verification mechanism that would detect any off-book transactions or creative rounding schemes
• Build public buy-in for a modernization effort that otherwise might be viewed as a bureaucratic burden on small businesses

E-invoicing would create an audit trail, but real-time reporting is the second piece of the puzzle.

Under current practices, state sales tax compliance is a backward-looking exercise. Transactions happen, receipts may or may not be issued, and tax authorities come in to reconstruct the picture weeks or months later. The gap between the point of sale and state oversight is where fraud, underreporting, and perhaps soon creative rounding schemes will live.

But a system where every invoice is digitally transmitted to the tax authority at the time of sale isn’t just auditable—it’s self-auditing.

For businesses, this would reduce compliance uncertainty. The system would auto-enforce the tax administration’s rules in real time. If a company issues a valid invoice to its customer, collects the tax it claims is owed, and remits that tax to the tax authority, it’s in the clear.

For governments, this would mean cleaner data, fewer post-sale disputes or undercover purchases to catch sales tax fraudsters, and lower administrative cost of enforcement. For taxpayers, it would mean a retail experience where tax compliance is clear and transparent.

States shouldn’t address the “pennypocalypse” with patchwork fixes that leave retailers guessing. They should treat this moment as a chance to rethink how retail tax enforcement works from the ground up. Rounding rules and tax calculation all should be encoded in transactions themselves and taken out of retailers’ hands entirely.

With penny shortages on the horizon, the old assumptions about how retail tax is administered should be jettisoned in favor of modernized compliance systems. The old copper coin may be dead, but this state policy opportunity is alive and waiting to be seized.

Andrew Leahey is an assistant professor of law at Drexel Kline School of Law, where he teaches classes on tax, technology, and regulation. Follow him on Mastodon at @andrew@esq.social

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