Gov. Baker Files $44.6B State Budget:

Proposes “Real Time” Sales Tax Collections & Lottery Sales on Debit Cards

On January 22nd, Gov. Charlie Baker filed his FY21 state budget proposal (H.2), a $44.6 billion spending plan that marks the first step in a long budget process that will play out in the Legislature over the next several months.

As we expected and for the fourth year in a row, the Governor’s budget includes a sales tax modernization proposal, making changes to the state’s sales tax collection and remittance process.  The proposal this year is a return to “Real Time” or daily remittance, requiring third party processors of credit/debit transactions to remit to the Commonwealth, on a daily basis, the portion of a sale that is attributable to sales tax, with an effective date of July 1, 2023.  Any vendor subject to the collection of sales tax, sales tax on meals, or local option meals tax, that collected and remitted in excess of $100,000 in sales tax the previous year, will be required to separately identify the tax and non-tax amounts for which payment is sought from a third party payment processor.  The third-party payment processor will then directly pay the identified tax portion of to the DOR on a daily basis.  Because of the timing of this proposal, we can refer to it as “Phase Two.”

In advance of those changes by July 2023, the proposal also calls for a more immediate impact, “Phase One,” on the current remittance process, allowing the DOR by regulation to establish an early remittance tax filing by all filers over that same $100,000 collection threshold.   The current process, including the requirement to remit by the 20th of every month, is spelled out in statute, as adopted by the Legislature.  The Governor’s language would take that decision-making process out of the Legislature’s hands and allow the DOR to set the deadline for remittance.  This would be in addition to the proposed changes impacting credit/debit purchases in July 2023.

Phase Two continues to be widely opposed by the transaction and payment industry, from retailers to credit/debit card companies, to card processors, to banks.  The opposition is united, as those changes would impact the entire payment system.

Phase One of the Governor’s proposal would only impact the vendor or seller of the product or services.  All tax filers with more the $100,000 in annual tax remittance would be subject to the change on the remittance of sales and use tax, sales tax on meals, local option meals tax, room occupancy taxes, and marijuana taxes.

A third component of Baker’s proposal seeks to increase the penalties and expand the reach of the law with regard to the use and promotion of sales tax suppression devices known as “zappers.”  The budget proposes significant civil penalties on those who sell or install "zapper" software, which is software that falsifies the electronic records of electronic cash registers and other point-of-sale systems.

The language of the proposals from the Governor’s budget is here:

Phase Two, similar to proposals in the past, would require third party payment processors to collect and remit sales tax from retailers on a daily basis, on all third-party credit and debit card purchases.  Today, when a consumer purchases an item with a credit card and the total transaction cost is $106.25, the credit card processor does not know if any of that amount is attributable to sales tax.  The item might be a dress, fully priced at $106.25, and not subject to the sales tax.  The item might be a $100 lamp, plus $6.25 in sales tax.  The processing network, the credit card company, and the card issuing bank do not know any of this.  They know the credit card number; expiration date and security code and they know the total.  They receive the information they need to know to process a payment transaction and to do it quickly, as the network processes millions of transactions every day. 

Retailers, card companies, processors and the DOR would incur over a billion dollars in new expenses to build out and reprogram a new system – costs that would be passed onto consumers and taxpayers – in a process that, if even possible at all, would take many years to implement.  “Real Time” collection is an untested theory, a collection idea that does not exist in practice in any form, in any state or municipality in the country.  No “new” revenue will be generated.  Only the remittance timing will change on sales tax that would have been collected and remitted anyway.  At the start of the process, in the first month of implementation, the sales tax collected will be remitted a month early, along with the tax collected the previous month, essentially squeezing thirteen months of collections into twelve months. 

This does not increase sales resulting in increased revenue.  There is no new money to be found.  This would simply provide a one-time increase during the initial month of implementation, a one-time revenue boost of money that the state was going to get anyway.  The DOR also would be deciding who the early remittance applies to.  If they choose to go to the $100,000 annual threshold as allowed for in the language, that would mean all retailers and restaurants with more than $1.6 million in taxable sales would be impacted.  Those are small businesses.  This proposal is anti-small business and would negatively impact our local, family owned, independent sellers who are already struggling under the burdens of soaring rents, high health insurance costs, the EMAC tax, the increasing minimum wage and the forthcoming mandatory paid family and medical leave program.  And to add to that burden, retailers and restaurants in the Commonwealth bear the burden of the cost of collection, more so than competitors in others states, the majority of which have some form of a vendor’s collection allowance to mitigate that cost to collect.  We expect a significant fight in the Legislature on this proposal and RAM will continue to lead on this issue and work with our coalition partners to oppose it.

H.2 also includes a proposal to allow for the purchase of lottery products using a debit card.  The prohibition on the use of credit cards to buy lottery products would remain in effect.  Unfortunately, the proposed language does not include any changes to the lottery agent commission structure to mitigate the loss in revenue that would result from debit card swipe fees.  Unless the Legislature addresses this issue to protect our lottery agents from increased swipe fees, RAM will strongly oppose the advancement of this provision.

The Governor’s budget now goes to the House, which will release and debate its own budget proposal in mid to late April. 


Legislative Reporting Deadline Arrives 

Under the joint rules of the Legislature, all Joint Committees are required to issue a final report on all the legislation pending before them by the first Wednesday of February, in the second year of the two-year session.  With the arrival of that date, we expect to see significant activity on bills of interest to the retail industry.