Local governments, now more than ever, need to automate sales tax revenue collection

As of this writing, the coronavirus pandemic, in its rolling phases across the U.S., is causing material, and potentially long-term harm to local government investments – and budget pressure is unprecedented. The ripple effect of nosediving consumer spending depriving states of sales tax, a major source of revenue, and states being local governments’ most significant revenue source, has put municipalities in the danger zone.

Add to this the 20th Century methods used by local jurisdictions to administer sales tax compliance and revenue collection, and you’ve got an urgent, “push comes to shove” moment where local tax officials must take stock of the present and near future, look to examples of a small group of municipal governments taking the leap toward modernization, and act.

Paper checks stand between municipalities and modernization.

Hard copy documents. Wet signature requirements. Reliance on the U.S. postal service. These are just a few of the hallmarks of municipal government inefficiency today. But it is perhaps paper checks that best represent the anchor keeping local governments moored to antiquated processes, which in turn delay desperately needed sales tax payments. Municipalities remain in a modus operandi of slow, inefficient, unreliable, and increasingly untenable revenue collection.

The process for a business registering to collect sales tax, filing local sales tax returns, and remitting sales tax due, very likely involves a hard copy return. While some local taxing authorities are able to track sales tax returns electronically following receipt, the key steps in the path for jurisdictions to receive sales tax revenue due are largely non-digital. And paper checks are most susceptible to error and delay, including late payments, lost payments in U.S. Mail, checks getting separated from sales tax returns during processing, or misplaced or lost at the jurisdictional level. These errors can impact taxpayers, with resulting delinquency notices, penalties, and accrued interest.

This point has never been so critical as now, when many local government offices are closed indefinitely, with little or no staff on site to receive and deposit sales tax remittance payments. And if personnel are available, payment with paper checks equates to businesses remitting payment at the latest possible date; reliance on the pace of U.S. Mail carriers, including margin for error; processing payments at the local government level, then making bank deposits. This process could take 10 days or more for funds to be available for mission-critical needs.

This scenario, in total, underscores how acceptance of paper checks as a payment method, in addition to other non-digital processes associated with sales tax compliance, has hit a logical expiration date in the face of available options for rapidly recouping revenue.

Alaskan municipalities successfully outsourced sales tax compliance

The 49th state in the Union might sound like an unlikely candidate for modernizing their sales tax collection processes. Alaska has no state sales tax, but 100+ local governments (cities and boroughs) require businesses to collect and remit local sales taxes. And a growing list of local governments in Alaska are now imposing economic nexus on certain out-of-state sellers, as a result of the 2018 Supreme Court South Dakota v Wayfair decision. Remote sellers, as well as marketplace facilitators, must register to collect and remit sales tax if their sales into Alaska during the previous calendar year meet one or both of the following thresholds:

$100,000 or more in statewide gross sales from the sale(s) of property, products, or services delivered into the state; or

200 or more separate transactions of property, products, or services delivered into the state.

Thus, sales tax compliance quickly became complex for businesses selling into a clutch of local Alaskan jurisdictions – but it also became significantly more complicated for the jurisdictions, with limited staff (often a part-time employee who also serves, for instance as a local fishing guide), and absence of technology solutions required to handle the incoming registrations, returns, and remittance.

While states and cities across the country have wrestled with the need for tax modernization, with many understanding the benefits of digitization, the stumbling block is often a matter of perception – lack of financial and technical resources to build or buy, and maintain, technology systems allowing them to enter the 21st Century.

But there was another option, and Alaskan local governments took an alternate path to modernization – they outsourced their total tax technology needs. Just as apps like Uber have disrupted the transportation industry, the governmental tax compliance space has new entrants that offer fully managed options for handling sales tax registrations, returns and remittance processes.

The Alaskan locals are using an outsourced service named MUNIRevs – technology that sits between businesses and state or local government tax departments. The growing number of Alaskan cities and boroughs choosing to move from the world of paper checks and hard copy sales tax returns to a new world of ACH (electronic funds transfer network) processes that reduce the receipt of funds in bank accounts from up to 10 days to a mere 24 hours are a model for other municipal governments. And, unlike paper checks, ACH payments don’t bounce.

Note that Alaska is not the only state with local governments adopting this model. Some Colorado cities have jumped in as well, and we can expect the tax compliance outsourcing trend to continue in lock step with the pandemic-driven disruption to timely revenue collection, in addition to successful modeling by the aforementioned municipal tax departments.

From the examples of early digital adopters, the solutions for local governments are well at hand. Per William Gibson, “The future is already here – it’s just not evenly distributed.”

Pam Knudsen is the director of compliance services at Avalara.