Data Sharing Among States Key to Better Business Tax Compliance

Jul 6th 2016
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Business tax noncompliance is a significant problem nationwide, with sales and use and withholding taxes contributing the most issues. And in states with more complex tax codes and higher rates, fraud raises its ugly head.

Those are key findings in a new report by the Governing Institute. With sponsor LexisNexis Risk Solutions onboard, it’s no surprise that the report concludes more and better data analytics would at least partly alleviate the problem.

Researchers interviewed primarily revenue and taxation officials in 28 states and the District of Columbia. Other respondents included a mix of officials and end users of data analytics technology, followed by only end users in three states.

“There are no universal answers to a problem this diverse, but it’s clear states are looking for more and better data that can enhance their current tax systems,” the report concludes.

Taxation officials consider the sharing of business data across state lines as one way to get a better picture of a business and thus improve tax compliance.

Here’s a sample of other takeaways from the report:

  • Most respondents (85 percent) indicated that business tax noncompliance is a problem within their state. Nearly 30 percent viewed it as a major concern, while 55 percent considered noncompliance a minor problem. States attributed noncompliance troubles to remote sellers, complicated tax codes and many new statutory changes, a perception that businesses can get away with noncompliance, and businesses with multiple locations and filing periods, among others.
  • On a national level, the majority (74 percent) indicated noncompliance was a major problem. They cited federal and state laws that help big businesses minimize their taxable income but maximize their losses, resulting in reduced tax collections than should or could be. Respondents also indicated that solving the problem would require congressional action, and numerous tax code changes contribute to the noncompliance along with inadequate federal funding for enough staffers to monitor noncompliance.
  • The majority of respondents (62 percent) are satisfied with their current internal resources to battle noncompliance, such as using integrated tax systems, historical filing data, and in-state data warehouses. And about half (49 percent) said they were OK with their current external resources, which include the IRS, third-party vendors, and multistate groups. In fact, 81 percent said they share information with other agencies, such as the Multistate Tax Commission and the Federation of Tax Administrators.
  • Besides the sales and use and withholding taxes mentioned earlier as the most problematic for noncompliance, corporate income and franchise taxes also pose problems.
  • Three taxation areas had no reported noncompliance issues: Mining, fishing, and gaming; excise; and environmental.
  • States are uncertain of compliance issues connected to the so-called sharing and gig economies. Respondents cite a lack of statutory requirements that would make the businesses more accountable for taxation.
  • While all respondents rated the need for a complete view of a business as 4 on a scale of 1 to 5, 59 percent said they have unmet needs in obtaining those views. Those needs include training for auditors and collectors, inability to see data on pass-through entities, and an inability to link data from the same businesses.

“Tax noncompliance impacts everyone,” Haywood Talcove, CEO for the Government division of LexisNexis Risk Solutions, said in a prepared statement. “Business owners can inadvertently find themselves in violation, leaving their companies liable to penalties and even dissolution. Noncompliance can also shift a greater share of the tax burden to honest taxpayers. Whether it’s unfamiliarity of tax code requirements, misreporting, or fraud, states want and need to do a better job in closing the tax gaps by accessing more data and leveraging new technologies.”

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