Overview of common tax gap theme at the recent 2016 Sales Tax Symposium and the 2016 Value Added Tax Symposium, both sponsored by the Institute of Professionals in Taxation
I recently had the distinct pleasure of attending both the 2016 Sales Tax Symposium and the 2016 Value Added Tax Symposium, both sponsored by the Institute of Professionals in Taxation in Indianapolis, Ind. As one of a handful of members who attended both conferences, I find myself in a unique position to comment on themes that ran through both sets of presentations. One such theme was addressing the “Tax Gap.”
What is the Tax Gap?
For those who are not familiar with the term, the Tax Gap is a measure of tax revenue that goes uncollected (for a variety of reasons) under existing statutory and regulatory requirements. In other words, it represents tax revenue that could be collected but is not because of non-compliance. Current studies place the US gap at $458B USD and the European gap (for VAT alone) at $170B EUR.
In an era of shrinking revenues coupled with legislative gridlock that prevents the enactment of new taxation measures, this figure now receives quite a bit of attention.
Sales Tax Perspective
During the Sales Tax Symposium, we heard from the senior-most regulators from several Departments of Revenue, who discussed how the current economic climate impacts their decision-making processes. A common point of emphasis was the increased use of data analytics to improve audit selection and fraud detection.
Numerous presenters mentioned that states are continuing their efforts to increase collections under existing federal restraints by enacting click-through and affiliate nexus provisions (e.g. Louisiana), as well as through “notice” provisions (e.g. Colorado, Louisiana, Vermont,) that seek to inform consumers (and sometimes the relevant DOR) of outstanding individual use tax liability.
We also received a detailed update regarding the ongoing legislative and judicial efforts that could lead to the elimination of the Quill physical presence requirement. While the Marketplace Fairness Act and the Remote Transaction Parity Act remain under consideration, Rep. Goodlatte enlivened the debate by issuing a discussion draft of the Online Sales Simplification Act. The act proposes to apply a “hybrid origin” tax system where tax revenues are distributed to destination jurisdictions via a clearinghouse.
This proposal bears a passing resemblance to the Mini One Stop Shop (MOSS) that currently exists in the European Union for digital services. From a judicial perspective, Justice Kennedy’s call to action in the DMA v. Brohl decision has resulted in state litigation in both Alabama and South Dakota, which both enacted “economic nexus” provisions. A similar regulation is being contemplated in Tennessee.
During the VAT Symposium, we discussed the Action Plan on VAT which was issued on April 7, 2016 by the European Commission. One of the fundamental precepts of the Action Plan is to modify the current EU VAT regime to make compliance easier and eliminate the opportunities for fraud that exist in the current system.
Later in the week, I had the distinct pleasure of delivering a presentation with my colleague Casper Winkelman as well as Mark Houtzager from US/VAT on the topic of “E-Audits.” We discussed the global trend (which has not come to fruition in the US just yet) of state regulators requiring real-time or periodic transactional information from taxpayers (e.g. Brazil, China, Taiwan). Real-time data can be extremely effective in determining the accuracy of periodic VAT filings.
In Europe, where real-time reporting has yet to catch on, countries are moving to require the periodic submission of the Standard Audit File for Tax (SAF-T) report. SAF-T is a concept that was introduced by the OECD in 2005 and is now really catching on. While the requirements vary from country to country, an SAF-T file generally contains transaction-level details on invoices, orders, payments, and adjustments. SAF-T reports are currently or will soon be required in Portugal, Luxembourg, France, Austria, Poland, Czech Republic, Lithuania and Norway.
In summary, both Symposia reiterated that the Tax Gap is currently (and will continue to be) the primary driving force behind changes in tax regulatory compliance. Interesting times in tax compliance are approaching rapidly due to the expanding use of technology.
- Learn more about how Sovos solutions take the stress out of Value Added Tax compliance.
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About the Author
Charles Maniace is the Director of Regulatory Analysis at Sovos. An attorney by trade, Chuck leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos clients continually complaint. Over his 15 year career in tax and regulatory automation, he has given talks and presentations on a variety of topics including The Taxation of High Tech Transactions, The Taxation of Remote Commerce, The Regulatory Implications of Brexit, The Rise of E-Audits, Form 1042-S Best Practices and Penalty Abatement Practices for Information Returns. Chuck is a member of the Massachusetts Bar and holds a BS in Business Economics from Bentley College, a JD from Boston University School of Law, and an LL.M in Taxation from Boston University School of Law.More Content by Charles Maniace