Voluntary Audit Proposal Needs More State Buy-Ins to Work Best

A proposal before the Multistate Tax Commission lays out a sales tax compliance policy that could be revolutionary: voluntary audits of current practices by complex retail establishments with sufficient annual receipts to warrant dedicated in-house sales tax specialists. The proposal is a good start to help businesses of all sizes navigate the complex sales tax landscape, but it needs enhancements to reach its full potential.

The Sales Tax Compliance Assurance Review program would foster a cooperative and less adversarial relationship between tax administrations and businesses charged with collecting and remitting sales tax for customers.

To expand the program’s reach and effectiveness, states should be encouraged to opt in through information-sharing agreements and the highlighting of success stories from existing signatories. And in addition to auditing businesses, state tax authorities should provide a voluntary review and certification process for point-of-sale software systems.

The program’s proposal is prospective rather than retrospective, which is a novel approach to sales tax audits. It would involve real-time reviews and collaborative resolutions between taxpayers and tax authorities for compliance issues discovered in the audit. The goal is to identify and resolve compliance issues early, before they become significant problems.

This approach prioritizes education and support over punishment, operating under the assumption that businesses want to comply with tax laws and that honest mistakes are more common than fraud.

Retailers with complex tax situations could opt into the program and work with the MTC to ensure compliance. Entry would be selective, and retailers would need to apply. Those accepted would start with pre-audit conferences to reveal the taxpayer’s recordkeeping systems and familiarize the tax authority with their business.

State tax administrations would benefit from enhanced compliance and a better picture of issues business-taxpayers face. They also would glean useful data for future audits such as average error rates and common mistakes or oversights. Taxpayers, meanwhile, could have the tax administration “check their work” outside the auspices of a formal audit.

More states must participate for the program to realize its full potential and provide for at least some uniformity in state sales tax policy nationwide. Only 26 states are MTC compact or sovereignty members, which means any policies the commission adopts or initiatives it undertakes would only have a direct effect in those states.

Some of the largest states in terms of population and retail sales, including Pennsylvania, New York, and California, aren’t MTC members. Expanding the number of participating states would help create a standardized approach to sales tax compliance across the country.

Successful outcomes in participating states would show the benefits of the program to non-signatory state tax administrations. States that see how the program improves compliance and collections may be motivated to participate.

Engaging stakeholders, such as POS software developers, also would create pressure on non-signatory states to sign on. The current audit landscape often targets retail establishments using certain POS systems that have been previously implicated in non-compliance through other audits. A corollary program that allows for voluntary review and certification of those systems could enhance the MTC’s program.

The benefit to expanding a program that allows review and certification of POS systems would be a presumption of good-faith compliance. Retailers using MTC-certified systems would be presumed to be acting in good faith with their sales tax compliance—and reduce the likelihood of audits based on choice of software alone.

Through certification, the MTC could create a trusted list of systems from which retailers could choose. Such a repository would reduce the incidence of audits triggered solely because of software-related issues and allow state tax administrators to focus on more substantial compliance concerns.

To implement such an expansion, the MTC would need to develop a comprehensive certification framework.

The first step would be to define clear and measurable criteria for POS systems, such as accuracy in recordkeeping, tracking of deleted transactions, data security, data retention, and compliance with current sales tax laws.

POS system designers and developers should be able to apply for certification by submitting their systems for review, both through exemplar systems and systems deployed in businesses that agree to aid in certification. The application process should require detailed documentation and technical specifications, as well as testing, to ensure compliance.

To maintain certification, POS systems should undergo periodic reviews like those in the proposed system. Regular updates can ensure systems meet the latest standards and regulations.

Perhaps most important, the MTC should maintain and publish a list of certified POS systems so business owners have a list for selection. This would assure retailers that they are doing all they can to comply with sales tax laws and not run afoul of tax authorities.

The program is an ambitious undertaking but is timely and necessary to bring state tax administrations into the 21st century.

Integrating the certification of POS systems into this major initiative isn’t as daunting as the initiative itself. It complements the program’s existing goals by providing an additional layer of assurance and compliance support for retailers, which furthers the proposal’s policy goals.

Auditing and “certifying” a business as compliant with relevant sales tax laws while certifying its POS as compliant would streamline the process by guiding certified business—as well as other businesses that are deciding between POS systems.

If the MTC makes these enhancements now, we can begin to tackle the sales tax compliance problem collaboratively with business owners and POS developers. Expanding the MTC’s program by implementing a certification process for POS systems would bridge the way toward real-time tax remittance and a fully digitalized sales tax system—which has been demonstrated as possible and effective.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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