Tax Matters Podcast: The New Normal for Indirect Tax

Episode Overview

In this episode of Tax Matters,  Vertex Chief Tax Officer Michael Bernard highlights data from the Vertex Sales Tax Rates and Rules Report. Michael also previews numerous different types of tax policy changes – as well as some related moves designed to boost revenue - looming on the horizon this year.

Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.

Tricia Schafer-Petrecz: Welcome to Tax Matters, a Vertex podcast. I’m Tricia Schafer-Petrecz, Public Relations and Social Media lead at Vertex. In this episode, business writer Eric Krell speaks with Vertex Chief Tax Officer, Michael Bernard. Michael starts by spotlighting key insights from the Vertex Sales Tax Rates and Rules Report. He devotes the rest of the podcast to discussing the new normal that indirect tax leaders should expect in 2021. A number of potential rates and rules changes are looming on the horizon. Michael also reports on audit activity, Maryland’s new digital advertising tax, payroll tax battles at the state and city levels, and more. Now, I’ll turn it over to Eric and Michael.

Eric Krell: Mike, you’re anticipating indirect tax changes at the state and local levels this year; before we discuss what those might look like, what should we know from Vertex’s year end 2020 sales tax rules and rate change report? What are some of those highlights? 

Michael Bernard: Well, I immediately think a couple of things. As you know, the pandemic caused closures, particularly in certain industries and in certain states where revenues were greatly reduced. What you’re going to see coming out of 2020 is that a lot of states ran deficits. What you’re going to see in 2021, as a result, is that there will be some tax increases. Let’s cover some of the highlights from 2020, really quickly:  70% of the new rates we saw implemented during 2020 occurred at the district level. When we say the district level, we mean funding mechanisms for parks, streets and sewers, for example. So a lot of those places were disproportionately impacted…We also saw a number of new taxing new cities come on board, almost 70 of them. The other thing is that the combined average rate for US sales tax across all states rose slightly to a 10-year high of almost 10.12%. So, obviously, a lot of things are going on in the transaction tax world.

Eric Krell: And a lot of things seem like they may occur this year. Given that 2020, with the few exceptions that you point out, was fairly typical in terms of the volume of rate changes that occurred, what might we expect this year? 

Michael Bernard: I think what you’re going to see is a continuation of some of the things that localities, particularly states and local districts, did in 2020. Unfortunately, a number of them probably had to cut services in some instances, they probably had to furlough employees, unfortunately. We saw a lot of that in the education system. And then a number of jurisdictions issued debt to actually get through a difficult period of time when they were still required to provide services to fulfill certain obligations that they had with regards to debt service. The other part of this, obviously, Eric, is the idea that taxes are going to have to be increased to pay for a number of these things, and it’s just a question of how quickly the locales and the states want to do that. And by the way, I want to mention that there weren’t any states that raised their general sales tax rate in 2020, but that could be coming in 2021.

Eric Krell: Are there any examples of revenue-increasing actions state governments can take that don’t involve a rate increase or a new tax? I’m thinking, for example, of intensifying audit activity -- anything along those lines, you can talk about, Mike.

Michael Bernard: What we found in our discussions with our customers is that while audit activity slowed a bit, particularly in the March to August or September timeframe, those audit levels are now back up to where they were before the pandemic. I think that probably makes sense to a lot of our listeners. Throughout much of last year, many state employees were still trying to figure out how they were going to audit remotely. And a lot of them were told not to do anything -- to wait until there was more guidance concerning when returns were due. From what we’re hearing and seeing today, audit activity is back up again.

I think the other thing you’re going to see besides raising revenue through the audit area is that certain industries that performed very do well during the pandemic might see some loss of exemptions. You might see some loss of credits – those types of activities occur around the margin of passing new laws and rate increases. There’s a wide range of things that states have available to them besides raising sales tax rates.

Eric Krell: Mike, what about amnesty programs? Are those a possibility in 2021, and maybe even beyond? 

Michael Bernard: They’re always a popular program to accomplish one thing – and that’s to get taxpayers who haven’t been compliant to actually get them on board and have them be compliant going forward. Obviously, a lot of those companies are worried about paying penalties and taxes for back years along with interest, but mostly what those programs are designed to do is to get people on board. This could be applied, for example, to companies that crossed over the new economic nexus standards for Wayfair and just haven’t kind of gotten on board in terms of filing. I think that’s where states actually could do some good in terms of offering those programs and getting taxpayers to actually start complying and remitting taxes.

Eric Krell: Let’s look at possible new types of taxes. Are there any potential new taxes that might be introduced at the state or local levels … or that already have? And I’m teeing you up here to maybe talk a little bit about Maryland, which we saw a pass a law calling for a new type of tax.

Michael Bernard: Well, I think Maryland is certainly a unique case because it presents some constitutional issues that haven’t been decided by the courts yet. So, what I can say to our listeners is: pay attention to what’s going on in Maryland. There will be court cases and legal decision concerning Maryland. So, while some states may rush to pass that type of legislation, it remains to be seen how that type of legislation will work its way through the courts. There are commerce clause issues, and there are equal protection issues -- both which are at the federal level, and they could be at the state level as well. So, stay tuned for those.

Eric Krell: And Mike, I want to clarify for our listeners: we’re talking about the Maryland digital advertising gross revenue tax that was passed in mid-February and set to take effect. Legal challenges are sure to follow, in fact, they’ve already been put in action. Correct? 

Michael Bernard: Correct. 

Eric Krell: Any other types of new tax categories that states might consider this year? 

Michael Bernard: Well, I would say look more at the sub-state level because I think states are probably going to stick with their general sales tax revenue. At the sub-state level, we have started to see gross receipts taxes -- a gross receipts tax on sales with almost no exemptions. That’s a very easy tax to pass, to implement and to audit, so that will have some popularity and we’re already starting to see that. We’re also starting to see a number of cities institute a gross payroll tax. To the extent that you have someone who’s located in a particular city, that state or that city is actually going to impose some kind of payroll tax on that. Again -- easy to implement, easy to audit, and with very few exemptions, so it’s popular. I think where the payroll tax is going to be challenging is now that so many people work remotely, the question becomes: where does that person provide services? Is it still in an office building where they don’t go to work or its it maybe a nearby suburb or even an entirely different state where they actually reside? Those are some issues that actually have to be worked out with these payroll taxes.

Eric Krell: States are already squaring off on that topic, right, Mike? In fact, I think New Hampshire is trying to work it out with New York and Massachusetts. Am I correct on that? 

Michael Bernard: Yes. The issue is that in 2020, if you were working at, say, an office in Boston, and because of the pandemic, you moved to your office home to where you live New Hampshire. That’s where you spend almost 100% of your time providing your services to that company. Last year, many states took kind of a light-touch approach and said, “Okay, look, we’re probably not going tax you where your home office is in 2020.” But that’s all shifted now because a lot of people have now moved to a permanent home office, or at least a long-term home office. Let’s take the example of moving from Boston to New Hampshire. In 2021, states expect companies to properly remit and collect payroll taxes based on where those employees are actually located. So, that will be an emphasis of audit, and it’s probably going to be an emphasis of new statutory rules that are put in place in 2021. 

Eric Krell: So there’s a lot going on. And to add to it, I want to ask: are there any global tax policy changes regarding VAT or anything else that are important to follow this year? 

Michael Bernard: I think there are a couple of things, and this is an area where companies are struggling to understand how this will affect them. One of the tenets of taxation is that there’s a uniformity to taxing in the transaction tax world, and in the income tax world. The sourcing rules are the same, generally the compliances requirements are the same, and the exemptions are for the most part the same. However, what you’re starting to see is different countries in Europe applying real-time reporting, e-commerce clearing or a number of similar initiatives that they feel are important on their own. They’re not working through a unified body -- like the OECD. And then you have something like Brexit on top of that trend as well as more countries passing their own digital advertising taxes. So, we’re seeing this hodgepodge network of countries instituting new taxes but not doing so on a uniform basis. The challenge that companies have that they now have to report something in Sweden, but they don’t have to report in Italy -- or they have to report it in Italy, but they don’t have to report the same information in Germany… This will  continue to be a real challenge for companies.

Eric Krell: Mike, last question: What are some high-level considerations tax leaders should keep in mind as they try to keep track of all these changes coming down the pike? 

Michael Bernard: I’d say one thing in the policy area, and then I’ll talk about the operational area. In terms of policy, if you’re a leader in a certain industry or you know leaders in a certain industry, you really should work as a group to advocate for policies at the state level that makes sense, that you can comply with and that do not add substantial compliance costs to your infrastructure. The second thing is tax leaders and organizational leaders -- the vice president of tax, the CFO and possibly the audit committee – should know that these types of changes may occur quickly and that they will require technology changes to adhere to. Again, make sure that they are aware of these things and that they could come at any time. Any implementation of new technology that a company performs in response will have to be done in a relatively short period of time. States want the revenues quickly, so they’ll want policy changes implemented quickly. So, advocate for sound policy on the government relations side, but also be prepared to fund the changes and bring in the talent you need on the systems side.

Eric Krell: It sounds like advocacy and agility are important. Mike, thanks a lot, I appreciate your time. It’s always good to connect with you and I look forward to doing it again soon.

Tricia Schafer-Petrecz: Thank you for listening to Tax Matters, a Vertex podcast. Check back here for more episodes soon.

Featured Speaker

Michael J. Bernard, Chief Tax Officer – Transaction Tax at Vertex Inc. Vertex's Chief Tax Office (CTO) provides insight regarding the impact of tax regulations, policy, enforcement, and emerging technology trends on global tax department operations.

Michael J. Bernard

Chief Tax Officer, Transaction Tax

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Michael Bernard is the Chief Tax Officer of Transaction Tax. In his role, he provides insight and thought leadership around tax department operations, U.S. indirect tax, tax risk management, and tax policy, as well as emerging tax trends. He is an executive-level tax attorney with a diverse portfolio of experience in corporate tax, administration, and finance, including a substantive knowledge of U.S. and international tax laws.

Prior to joining Vertex, Michael was in various tax leadership roles at Microsoft Corporation for 28 years, the most recent being Senior Director – Tax Counsel. Michael led teams in the following functional areas: direct and indirect tax controversy, sales and use, business license, property, tax IT, SOX, and telecommunications. He also co-led a corporate taxpayer advocacy group with the Washington Department of Revenue and was a Director on the Board of the Washington Research Council. Michael has also testified before administrative and lawmakers at both the federal and state level.

Michael earned both a J.D. and a Bachelor of Science in Business Administration from Creighton University. He is a part-time lecturer of Law in the LLM program at the University of Washington School of Law. Michael also served on the board of directors, executive committee, and chaired committees for The Tax Executives Institute (TEI) for nearly 25 years.

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