Transactional Tax Issues Take Center Stage

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Let’s face it. Transaction taxes are more important than ever before. In this column, we explore this issue and its impact on technology with Michael Bernard, vice president of tax content strategy and operations and chief tax officer at Vertex, and Sal Visca, chief technology officer at Vertex. Michael Levin-Epstein, senior editor of Tax Executive, moderated the discussion.

Michael Levin-Epstein: Looking at transactional tax, what are corporate tax departments most concerned about in the regulatory area in 2022?

Michael Bernard: I think there’s a number of things that they’re interested in. First of all, let me start at least in the United States. Normally, what we do at Vertex is we actually track the changes in sales tax rates over a ten-year period. In 2021, we saw a historic high in terms of the number of cities that implemented a sales tax. We saw a historic high in the number of sub-city districts—these would be counties or fire districts or police districts—that actually instituted a sales tax. Then, we also saw a record number of both cities and districts that implemented increases to their sales tax. So, obviously, a lot of that was based on the costs of pandemic relief that was being provided by those jurisdictions. And I think you’re going to see this continue as 2022 evolves, because the issues that we’re dealing with [with] COVID aren’t over yet—we’re dealing with variants—and the states and the locals have actually cut their services. They’ve laid off employees, and now the only way to really meet their budgets is to institute higher transaction taxes. That’s the first thing. Outside of the United States, there was a lot of relief provided in Europe and a lot of relief provided in Asia and South America. Many of those economies have not recovered as quickly as they have in the United States. So, the loss of exemptions, or an expansion of the tax base, or even an increase in rates, I think you’re going to see these things definitely proliferate globally. The other thing I would add is that back in the United States, you’re going to see more of an extension of additional taxes that could replace, say, income taxes, at least at the corporate level. I say that because generally transaction taxes are more resilient to economic cycles, and what that means is they’ll go down faster but they also recover faster than an income tax would. So, you’re probably going to see an increase of, say, the gross receipts tax. Those are some of the things that I think our customers will be concerned about.

Levin-Epstein: What are you seeing in terms of technology investments by corporate tax departments? What have you seen this year, and what do you expect to see in 2022?

Bernard: I’d say what happened, particularly in 2020, was that corporate tax departments were concerned about digitizing their tax office. So, what we saw at the beginning of 2020, before the lockdown, is that only about forty percent of corporate tax departments actually had a digital office, which means they could work remotely, access their data remotely, and had centralized e-workbooks, etc. What many companies did was they actually standardized in order to achieve a digital office. That same activity continued in 2021, so that most corporate tax departments are now able to work from home and access financial and tax systems remotely. Corporate tax departments were successful at obtaining additional funding in 2021. Particularly, we saw a continued investment in the e-commerce space in 2021. In fact, many of our customers actually sold through either marketplaces or through different channels, because their brick-and-mortar stores significantly slowed down or contracted. We actually saw the e-commerce space explode.

I would say that 2022 is going to be more about efficiencies. What I mean by that is they are going to make sure that whatever IT environment they have today, they’re going to continue to invest [in] to make sure that automation—and I think Sal’s going to talk about this later—that whatever processes they need to do to automate their reporting process, be it tax reporting or accounting, they’re going to actually be working on that and trying to extend the good work that they’ve done in 2020 and 2021 into 2022 with automation.

Levin-Epstein: Sal, you’re the chief technology officer at Vertex. I’d like you to describe your role there and where your department will interact with customers at Vertex.

Sal Visca: Sure. As the chief technology officer at Vertex, my charter is to ensure that our product development is functioning, that we’re building the products that are in our pipeline, but that we’re also innovating and making sure that we’re what I always call “the art of the possible”—making sure that we understand what technology can enable and bringing that into business solutions. We’re developing an end-to-end portfolio of products and capabilities that our customers can use in determining tax, in managing compliance, in remittance, in returns, in analytics around this. And then the technology underneath it in terms of working with IT to be able to manage these solutions in the customer environments, whether it’s in their own environments, something that we’re hosting in a cloud environment for them, or if they’re using our full software as a service solution, SaaS. Our focus is very much to provide all of that capability and with options for how customers can consume it. I work very closely with a lot of our customers in our ecosystem to make sure that we’re not building software in isolation; we’re very much co-innovating. We’re working closely with our customers to understand their environments, constraints, and working with their IT people to understand the scalability, the reliability, the security requirements, as well as making sure that our products fit naturally in those environments.

Levin-Epstein: You were talking about your product pipeline. What technologies do you see coming in 2022 that will better enable your customers to have an experience that will help them as they go through transactional issues and data in tax?

Visca: As Michael alluded to before, our customers are transacting across many different channels. We often talk about “omnichannel.” Previously, it was ERP-based transactions and a lot of tax calculation, and compliance was done within those systems, and that’s something we still do extremely well. But we’re now also broadening significantly into e-commerce, which has, as Michael said earlier, really exploded for many organizations, whether that’s business to consumer, B2C; business to business, B2B; or business to business to consumer, more about marketplace kind of capabilities. Customers are finding different ways to push product through, to have transactions occurring, for money to flow in and out. A lot of our technology is really making sure that we can, as I always talk about, follow the money. As the money flows in and out of these organizations, we are making sure our solutions are there to make sure that the right amount of tax is being reported and calculated and remitted for required compliance. We also want to provide technology to our customers that can give them insights into what’s really happening in the business. I have to talk about the digital exhaust from these transactions, which is [that], as transactions are coming and going, a lot of data insights can be gained from that exhaust. Many of the systems we’re providing to customers are really taking these huge amounts of data and really extracting detailed information and insights. This makes it possible for our customers to understand where they’re approaching nexus in certain states and understanding the flow of these transactions as well as where their businesses are really growing.

Levin-Epstein: When [President Joe] Biden was at the G20, there was a lot of talk about a corporate tax globally. What are your thoughts about that possibility?

Bernard: Sure. I think the fact that so many countries signed to agree—some 130 countries—it is a historic event for sure. What clearly spearheaded this agreement is the market and financial success of US-based companies in the technology companies and the amount of profits, particularly where they were being reported. What’s interesting is that all of the details that are going to come out of this initiative are going to be worked out in 2022. The global minimum tax is supposed to go into effect, I believe, January 1, 2023. What that will do is a couple of things. It actually could eliminate digital taxes (profits, not products or services) that were imposed in Europe by a number of countries. So places like France, Austria, and Turkey and a number of other countries would actually have to pull those taxes back. Similarly, in the United States, states which have lined up behind Maryland . . . all of those states would actually, in order to implement the global minimization tax, they would actually have to pull back all of their proposals. So, there’s a lot of discussions that will need to be had over this next year; whether they can reach an agreement on it is yet to be determined. I think one thing we can definitely say is that it’s historic and is definitely going to influence the transaction tax space and the income tax space, too. In terms of our customers, I think they’re just waiting to see what happens. Obviously—and I think Sal would agree—to the extent whatever comes from all of this, we’re going to try and build a pipeline of products behind it to support our customer compliance needs.

Visca: Agreed. And I would just add that obviously the world of transaction tax is increasing in complexity, and a lot of what we’re doing on the technology front is making sure we can deal with the scale of complexity around the context and the different rules. As we know, there will be new taxes proposed for carbon taxes and other new taxes on specific items, and so we’re making sure that we’re forward-thinking in terms of developing new products and delivering enhancements. We’re working with Michael and the rest of the team to understand where tax revenues are going to come from and making sure that we can support them as well as all of the complexity that comes with it. I think it’s going to get pretty interesting. A transaction tax is one of the fastest ways for jurisdictions to be able to gain revenue and to rebuild from this current pandemic, so we’re ready for that. Our primary focus is building a platform and a set of technologies that can enable our customers to grow, shift, and pivot quickly as needed.

Bernard: Hey, Michael, if I could just add one comment. Something that Sal mentioned in one of his earlier responses—I just want to add a thought—and I’d like Sal to talk a little bit about application software development. The days of developing commercial software, where a software vendor just actually builds something and then hands a beta to its customers to test and review, are over. There’s tremendous talent within corporate tax departments to actually codevelop and work with us and other companies to develop these solutions. Maybe, Sal, if you could just expand upon that a little bit.

Visca: Yes. A lot of our tools and capabilities really need to help codify a lot of what these tax departments are doing, in some cases manually. When we talk about how much content is changing out there, trying to have a pipeline of automation, automation is key for tax functions and doesn’t negate the need for people. It actually increases the need for specialized domain expertise—using things like robotic process automation, RPA, using machine learning, ML, which is going to be critical to many of our solutions, and helping categorize products in the tax jurisdictions and for the types of products they have. Bringing these technologies to bear to help tax departments to do a very difficult job in an immensely complex, constantly changing environment is paramount, and that’s something that, as Michael said, you can’t just build a product twelve months in advance of where you think the problem’s going to be. You need to stay very agile as well as extremely connected to customers. We are committed and connected to our customer advisory boards and the various special interest groups we have in other venues to collaborate. And this is not just to ask, “What is the customer saying about our products?” It’s really understanding and walking in the shoes of our customers, considering their needs, discussing new possibilities, and being open to feedback.

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