In an effort to better understand remote sellers and their approach to sales tax compliance and the impact notices have, a team of accounting professors with the University of Texas at Austin conducted a randomized field experiment in collaboration with the Texas Comptroller’s Office.
“Some companies were using software that may not have been equipped to properly manage all of their Texas sales tax obligations as a remote seller.”
sales tax by the billions
As stated in the study, 33 states collected a staggering $23.1 billion in remote sales tax in 2021, up from $6.7 billion collected by 28 states in 2019. For Texas in particular, sales tax represents approximately 60% of its total annual tax collections. With the unequivocal materiality at issue, every state that imposes a sales tax has a fully vested interest in ensuring compliance with companies that have economic nexus with their state.
QUESTIONS ASKED
One approach that states take in an effort to bring noncompliant taxpayers into compliance is to send notice letters. The effectiveness of this approach was the impetus of the study. Specifically, the study aimed to answer two questions: (1) does correspondence from a remote tax authority affect firms’ tax compliance, and (2) what explains taxpayers’ compliance with a remote tax authority?
NOTICES SENT
To better understand the impact notice letters has on remote sellers, the Comptroller’s Office sent four types of notices to remote sellers doing business in Texas. The notices were separated into different categories: Inform, Deterrence, Fiscal Exchange and Social Norms.
The Inform letter reminded companies of the upcoming sales tax filing deadline and provided a link to file and pay online. The Deterrence letter indicated that sales tax filings would be closely examined and reminded taxpayers of penalties and interest for past-due taxes. Deterrence letters, as well as estimated assessments, collection notices and revocation of sales tax licenses, are commonly used by state departments as a tactic of urging immediate compliance.
The Fiscal Exchange letter informed taxpayers that sales tax revenue funds a significant portion of public services and contributes to the economic and physical well-being of any customers the company may have in Texas. Finally, the Social Norms letter addressed the civic duty of paying taxes.
INFORM & DETER
Interestingly, it was the Inform and Deterrence letters that sparked the largest increase of tax compliance among remote sellers. Overall, the letters temporarily boosted sales tax compliance in Texas among remote sellers by 105%.
costs quantified
Consistent with the awareness small and mid-sized companies already have, the study highlighted the overall cost of compliance for these companies in particular. On average, small and mid-sized companies spend an average of 163 hours and $17,000 per month on sales tax compliance.
Further, as noted by researcher Andrew Belnap, some of these remote sellers use software that may not have been equipped to account for all their sales tax obligations as a remote seller. In Texas specifically, Belnap noted that these tax software programs did not address any of the compliance issues that triggered the notices, leaving the company vulnerable to noncompliance and an audit.
mitigation & representation
Texas is just one of several states that issue deterrence notices. These notices typically include estimated assessments that are significantly higher than the company’s actual tax liability. Many times these letters also include collection threats.
Overwhelmed by tax compliance time and costs and audits? Not certain how to respond to a notice letter? We can help. Our team is experienced with understanding individual state remote seller laws and how they would apply to your specific company. No need to delay in reaching out ~ time and cost have a direct correlation.