The new Thomson Reuters podcast, Tax & Tech Talks explores the evolving intersection of tax and technology. Each episode explores current issues or topics, giving listeners an opportunity to gain a deeper understanding and new perspectives in tax and tech. We chat with top subject matter experts and industry leaders as we break down these top-of-mind topics.
From the 2018 South Dakota v. Wayfair decision to the current COVID-19 pandemic, the ever-changing and often disruptive tax landscape is prompting governing authorities to transform their sales tax systems, enact new legislation, and grapple with budget deficits. Couple these events with the technological transformation of tax and a growing push for the digitization of sales transactions, and it’s a perfect storm for indirect tax professionals.
The key to weathering this storm, however, is found in making a conscious decision to lean into technology like indirect tax software solutions and use it to its fullest extent for a more holistic and strategic tax vision.
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Do More with More? Dissecting the Fast Pace of Digital Transformation and Its Tax Implications
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Digital transactions accelerating in light of COVID-19
Because most sales tax concepts pre-date the digital economy, the majority of current tax rules presume in-person business activities, the sale of tangible goods, and the performance of in-person services. Today, however, companies can generate significant revenue through the remote provision of goods and services, reducing or eliminating the need for physical goods or local workforces to create value. Many digital sales are not neatly categorized as products or services, however. It’s usually a mix of both. So, a company coming up with a new digital product may find itself discerning whether the product is taxable based on a framework developed 70 years ago.
If we take a look at what’s happening today, the market is seeing an acceleration of digital transactions, particularly in light of the COVID-19 pandemic. With businesses around the world forced to close their doors, business owners have transitioned their sales from in-person to online. In many cases, this shift has changed the nature of how these products and services are taxed, creating new complexities.
Until recently, digital marketplaces like Amazon and eBay had to collect tax only on their own sales. After the Wayfair decision in 2018, states have slowly but surely developed new marketplace facilitator laws that shift the burden of sales tax collection. This means that digital marketplaces may be required to collect and remit tax not only on their own transactions but also on third-party sales the marketplaces facilitate.
As online transactions grow, both organically and in light of COVID-19, updating these tax guidelines is taking center stage as states seek to expand their sales tax base by taxing digital goods and services, digital advertising services, and other digital transactions. This push will likely be amplified as states face significantly increasing budget deficits in the wake of COVID-19. Sales tax automation software can help you keep up as the tax landscape becomes more and more complex.
How global tax authorities are upping their digital proficiency
In the midst of a global pandemic, governments around the world are starved for revenue. Given the potential income that taxing the digital economy offers, many global tax authorities are upping their game and using technology to transform the way they collect tax revenue.
From the OECD’s Base Erosion and Profit Shifting (BEPS) initiative to the SAF-T digital reporting standards, governments are increasingly using technology to look across all tax compliance reporting sets. In the United States, a single state audit can span sales and use, income, and even property tax simultaneously. In addition, tax fraud is prompting many governments to audit holistically across an entire organization. Auditors want to see that all the tax data sets match up, which in turn forces tax departments to embrace technology to remain compliant.
In addition, some countries, including Italy, are requiring companies to report arrangements—or the phase that occurs before the transaction. This pre-clearance of invoices may be a growing trend. If you’re a global organization operating in numerous jurisdictions, referring to this shift as daunting may be an understatement. Clearly, these initiatives will result in a lot more ground to cover for the tax department—and it is only beginning.
As we look ahead, the pandemic has laid bare the inequity in tax between small businesses and multinational organizations. With such economic disruption, there will likely be enormous pressure on multinationals to pay their fair share. In short, a lot more eyes will be on the tax department—but here’s why that may not be a bad thing.
An opportunity for the indirect tax department
As the digital economy transforms tax, an opportunity arises for the indirect tax department to transform itself with technology.
- Uncover new insights: With the workload for tax departments becoming more and more complex, technology is the enabler that can help keep pace. When it comes to facing the challenges of the digital economy head-on, tax needs a single source of truth. New technology such as artificial intelligence can help uncover insights, surface articles, calculate, predict, and even get ahead of what you need. Global tax determination software can provide you with real-time tax calculations for every tax jurisdiction in which you operate.
- Enhance processes, productivity, and decision-making: In today’s tax landscape, tax data should be cross-functional and analytic. Tax departments must lean into technology and promote the fact that tax is important and needs to be part of the company-wide decision-making process. Get involved in the business systems your company uses and push for tax-driven process change. Be strategic and look for ways of improving your organization’s efficiency with technology. Just as businesses are taking advantage of the ability to expand digitally, so too can tax departments.
- Deliver greater value: Many fear that an increase in automation will put traditional tax professionals out of a job. However, the opposite is likely true—if tax can transform itself into a technology-driven profession, therein lies an opportunity. Artificial intelligence can combine relevant research with your own fact pattern analysis and experience. That’s a combination that can propel tax forward and open up avenues for getting a seat at the table.
The complexity of the digital economy and the uncertainty of a global pandemic are increasing the demand for tax professionals who can dig into data, think strategically, and facilitate cross-functional audits. If indirect tax departments embrace technology, break down silos and shift operations, the result is a more efficient business and overall tax savings—and that’s an opportunity too good to pass up.
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