A recent analysis from MIT Sloan highlights the growing consensus on the need for digital advertising taxes to address this disparity. Countries are exploring various models to capture revenue from tech giants that often operate with minimal local tax obligations despite the profits generated in their markets. This approach aims to level the playing field between digital and traditional businesses and ensure that tech companies contribute fairly to public finances.

The report emphasizes the economic rationale behind taxing digital advertising. Digital ads not only influence consumer behavior but also represent a substantial portion of advertising spend. By taxing these transactions, governments can tap into a lucrative revenue stream that reflects the economic impact of digital platforms. The revenue generated from such taxes could be used to fund essential public services and infrastructure, potentially alleviating some of the financial burdens on traditional businesses and consumers.

Implementing digital advertising taxes presents challenges, the report notes. One primary issue is determining how to measure and allocate digital advertising revenues fairly, especially given the cross-border nature of many digital platforms. Accurately assessing where value is created and ensuring taxes are imposed accordingly requires intricate international cooperation and innovative tax policy. There is concern that poorly designed taxes could stifle innovation, deter investment, or distort competition in the digital marketplace.

What Governments Are Doing

Countries such as the U.K. and France have taken steps toward implementing digital advertising taxes, aiming to capture revenue from multinational tech giants. The U.K. introduced its Digital Services Tax in April 2020, targeting large digital businesses with substantial revenues from U.K. users.

Similarly, France’s Digital Services Tax, enacted in 2019, focuses on taxing large tech firms based on their French revenues. These measures reflect a trend among nations to address the revenue challenges posed by the digital economy.

A Digital-First World

The MIT Sloan analysis emphasizes that while implementing a tax on digital advertising is complex, it is a vital step toward ensuring the digital economy contributes its fair share to national revenues and public services. This initiative underscores the broader need to update tax systems to reflect the realities of a digital-first world. As digital advertising grows, the demand for effective and equitable tax measures is expected to increase.

The discussion around digital advertising taxes also raises broader concerns about fairness and economic equity, according to the report. Traditional businesses have historically faced high tax burdens, while digital platforms, despite their market presence and profitability, have often enjoyed favorable tax treatments. Taxing digital advertising aims to rectify this disparity, ensuring that the economic impact of tech giants is more accurately represented in national tax revenues.

Although the implementation of digital advertising taxes involves challenges, the potential advantages make it a valuable pursuit. By tapping into the revenue generated by digital platforms, governments can help balance the financial scales between traditional and digital businesses, support essential public services, and foster a fairer tax system. 

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Wendy Walker, VP, Regulatory Affairs at Sovos, told PYMNTS that when information is missing or doesn’t match IRS records, hefty fines can accrue — and the administrative burden of keeping track of all those details is considerable.

Case in point: The CP2100 notice — often referred to as a “B notice” for short — is the backup withholding notice issued by the IRS tied to payments of interest, dividends or gains from the sale of property. The withholding notice also applies to rent and royalties — in short, all non-employee types of compensation.

“The B notice tells a filer that the tax identification information that they reported on certain Form 1099s previously were incorrect, especially Taxpayer Identification Numbers [TIN] — and as a result, the IRS cannot match those forms with its own records, or collect the taxes that are due.”

As a result, the filer may need to “back up” or withhold 24% on future payments to the payee, until they can get  the correct info from that payee. The details can be basic, spanning legal names and Social Security numbers, for example — and payees don’t always understand exactly what data they should be providing. The complexities can be pronounced with pass-through entities like sole proprietors, single member LLCs, where there can be the inadvertent inclusion of erroneous data.

B notices are issued in the September-to-October time frame and apply to the most recent calendar year — so companies will start receiving notices applicable to 2023 in just a few months. For the companies that do not get a TIN in the manner required — well, those firms can be liable for any withholding from the time period covered and beyond.

Eventually, companies that are found to be deficient in what they’ve filed, a 972CG notice — or “P notice” — often follows, representing a proposed penalty issued by the IRS for all manner of faulty returns.

“Any filer that files an information return that had incorrect information or filed late,” Walker said, “or filed using the incorrect formats, should expect to receive this notice every year” for each year that had errors. But there’s room for confusion here, as the P notices are issued in the August to September time frame, but address errors from two calendar years ago. Thus: Starting next month, filers will receive penalty notices from the IRS that apply to tax year 2022, but at roughly the same time will get the B notices that apply to 2023. 

Juggling the different forms all can be challenging to say the least, especially in the financial services, payment processing and insurance industries, where tens of thousands of filings each year are the norm.

A significant percentage of firms, said Walker, tackle their 1099 reporting once a year … and then just wait for the IRS to issue these error notices and penalties. For a company that waits until Aug. 1 to address their issues, the penalty is $120 per filing. For the companies that wait until after that date, the penalty is $310 per record. Any finding that a company has intentionally disregarding the rules altogether is liable for a penalty of $630 per return.

In her own experience with these B and P notices, and working with client firms prior to Sovos, Walker said it has not been uncommon for entities to be fined hundreds of thousands of dollars or even millions of dollars. The penalty cap is nearly $4 million for a large business and $1.3 million for a smaller firm.

A Proactive Approach

A proactive approach, she said, can help head those errors off at the pass — and companies that are careful about their W-9 documentation (which informs 1099s) can prevent headaches later. Walker told PYMNTS that Sovos recommends that firms use matching solutions in their onboarding and back-office operations. Providers such as Sovos have real-time solutions that offer real-time TIN matching according to the IRS database.

“If you’re in a company that does anti-money laundering practices or know your customer and you’re collecting a bunch of that information, unless you are actually verifying that TIN to the IRS database, verifying to [any] other database doesn’t matter from an IRS perspective.”

The post Mind Your B’s and P’s: IRS Notices and Penalties Loom for Unprepared Firms This Fall appeared first on PYMNTS.com.

The company will use the new funding to expand its strategic partner program, continue to develop its tax credit platform and help SMBs implement an overall tax strategy, Arvo Tech said in a Wednesday (July 17) press release.

“By housing tax credits and tax strategy under one roof, we are providing companies with the tools necessary to make better financial decisions and capitalize on incentive programs available to them,” Terracina Maxwell, co-founder and president of Arvo Tech, said in the release. “Many SMBs are unaware of the initiatives, so we can make a big impact by bringing these disparate programs and strategies together for them.”

Arvo Tech’s tax credit support includes evaluating which employment tax credits are available to each business, continually monitoring to ensure each business can get the maximum tax credits, providing the completed IRS forms businesses need to claim their credits, and providing all necessary documentation and support from tax attorneys in case of an IRS audit, according to the release.

The company also helps businesses develop a comprehensive tax plan, prepare all necessary documents and applications, monitor their progress toward meeting their tax strategy goals, and ensure compliance with IRS regulations, the release said.

Arvo Tech has helped companies in a range of industries claim a total of $650 million in tax credits, per the release.

“Arvo Tech has emerged as a leader in this space,” David Grove, managing partner at Bandon Partners, which led the company’s latest funding round, said in the release. “Backed by a team with deep expertise and combined with its unparalleled technology, Arvo is set to disrupt how businesses plan and access critical incentive dollars.”

In another recent development in the tax space, Kintsugi said in May that it raised $6 million in a Series A funding round to further develop its tax automation platform.

Kintsugi’s platform aims to help both eCommerce and software-as-a-service (SaaS) businesses replace manual processes with an automated sales tax compliance solution.

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To get a sense of the task at hand and its complexity, there are 19,000 taxing jurisdictions making thousands of changes, which has a ripple effect across the entire supply chain.

“The governments are telling companies, in real time, what their responsibilities are,” Sovos CEO Kevin Akeroyd told Karen Webster, no matter if the company in question is a Fortune 500 conglomerate or a bakery in Portugal that ships cookies to five countries in the European Union.

But as Akeroyd noted, for the corporates embracing those changes, the impact is not solely about avoiding government actions.

“The stakes are just too high to get this wrong,” he told Webster, taking stock of the first half of 2024 as part of the “What’s Next in Payments” series. “And none of this can be done in silos.”

Ensuring Business Continuity

One might say that taxing authorities are using a bit of a carrot-and-stick approach, as being compliant means modernizing the office of the chief financial officer. Not being compliant means goods don’t ship. Part of the modernization mandate is collecting taxes before goods ship, not after they ship and money is collected from the buyer.

“It’s not about a penalty in the background anymore,” said Akeroyd. “It’s about ‘Do I get to do business tomorrow?’”

But compliance differs wildly from country to country. Romania is different from France, France is different from Portugal, and so on. As Akeroyd said, “there’s a massive amount of complexity on top of this huge demand for change, for digitization.”

There are some issues with which to grapple. Many enterprises don’t have the resources to meet the new, 21st-century tax compliance challenges. For the small baker, there’s a Byzantine labyrinth of systems, people, processes and data to deal with. Dozens of countries have implemented a value-added tax (VAT) or goods and services tax on cross-border online sales.

“The corporation out there is not where it needs to be in terms of a state of readiness, and they’re relying on a lot of service and technology people who do this for a living 24/7,” said Akeroyd. “The end user needs a lot of help.”

Automation and Orchestration

Firms such as Sovos create an orchestration layer that lets ERPs talk to order-to-cash systems and develop a system of record that avoids a veritable Frankenstein’s monster of processes and data flows and dozens of vendors, Akeroyd said.

Generative artificial intelligence has a role here, too, as rules become clearer about how advanced technologies are governed, how data privacy dictates ethical use, and how AI can be used for productivity.

“The content and data rules can be quickly translated into either self-help or automated support or faster product evolution that we can push forward right into actual end-user products,” he said.

Although it’s slow going, we’ll see more commonality of tax reporting across the EU, and through the next several months, “there will be more clarity headed into the second half of 2024,” Akeroyd said.

As he told Webster, “no matter where we sit in the ecosystem, humans have got to embrace change and get ahead of it.” With the shifting sands of tax compliance, “there’s a lot of rationality out there, and people are trying to get themselves ahead on the maturity curve” as they harness technology to pay the tax man.

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Designed for users in the United States and other countries, the new solution offered by this partnership is designed to help digital marketplaces navigate the global regulatory landscape, the companies said in a Monday (July 8) press release.

In this partnership, Taina will facilitate data collection, while TaxBit will simplify tax computations for income and eligibility and streamline the management of forms and any issues associated with B-Notices, according to the release.

With these capabilities brought together in a single solution, enterprises can increase their efficiency in everything from onboarding to reporting, the release said.

This solution arrives at a time when the global regulatory landscape is evolving. In the U.S., for example, the Internal Revenue Service (IRS) has implemented new reporting thresholds for 1099-K forms, requiring gig workers to report income over $5,000 in 2024 and over $600 in 2025, per the release.

“Together, our … platforms, shared experiences and resources will enable us to provide end-to-end tax compliance, keeping pace with the evolving regulatory landscape,” Sarah Cooper, chief revenue officer at Taina Technology, said in the release.

Erin Fennimore, vice president of tax solutions at TaxBit, said in the release that the partnership will “redefine tax compliance for the gig economy and digital platforms.”

Compliance changes can be “sudden, relentless and consequential,” Kevin Akeroyd, CEO at compliance technology provider Sovos, wrote in the PYMNTS eBook, “The Implications of Uncertainty.”

There are more than 14,000 regulatory changes monthly covering over 19,000 tax jurisdictions, according to Akeroyd.

“Because of this, three of the biggest challenges facing companies right now are risk, cost and lack of insights,” Akeroyd wrote. “Each of them can be addressed with the right technology and data.”

In the case of the IRS’s new reporting thresholds for 1099-K forms, the implementation was delayed in the past following feedback from taxpayers, tax professionals and payment processors.

The current plans for implementation resulted from efforts to reduce confusion and ensure a smoother transition, the IRS said in a November 2023 press release.

For all PYMNTS B2B coverage, subscribe to the daily B2B Newsletter.

The post TaxBit and Taina Partner on Gig Economy Onboarding, Tax Reporting appeared first on PYMNTS.com.

As Wendy Walker, solution principal at Sovos, told PYMNTS, the complexities of tax reporting will still demand that organizations of all sizes gear up for changes in the tax code and rigorous reporting requirements that will always be fluid and complex.

But one thing is simpler: The IRS’ Combined Federal and State Filing program seeks to simplify some of that complexity by taking things online. As Walker told PYMNTS, direct state reporting takes place — as the name implies — when an enterprise files 1099 tax information directly with a state government.

“Generally speaking, if you are required to issue a 1099 to the IRS, there is going to be a state requirement as well,” she said.

Tax laws require that states use most of the information contained in 1099s, W-2s and other returns that are filed with the IRS to compare income and withholding amounts on state income returns.

Enforcement Is Ramping Up

Although state tax reporting is nothing new — it’s been around for decades — Walker noted that enforcement has seen some renewed vigor in terms of making sure that all the information matches up. Missteps or failure to file those forms with the states winds up having consequences, chiefly in the form of penalties.

“Sometimes states have a per-failure penalty rate, so they will charge a certain dollar amount for each information return that has not been filed,” she said. “Other states will levy penalties based on the income reported on the returns that were not filed.”

“There can be pretty stiff penalties, depending on the state,” she added.

Amid the stepped-up enforcement, complexity reigns too. This is becoming more apparent as states lower direct-reporting requirements below IRS thresholds. Walker offered the example where some states now require direct reporting of Form 1099-K for transactions done through online apps such as Uber and DoorDash at a $600 threshold, while the IRS only plans to lower the federal threshold to $5,000 for 2024 reporting.

Although the IRS’ combined filing program seeks to allow states to file information with the IRS — and the IRS shares the info with the states — the fact remains that the IRS does not (yet) support all the information that states require. California, in just one instance, requires information returns for cancellation of debt that are not included in the combined program.

“So, if you are in California, you would have to file those returns directly with the state instead of being able to rely on the IRS,” Walker said.

In other cases, some states are listed as participating in the combined program, but their websites say that companies must file directly.

“This can all get a bit confusing,” Walker said.

Add in the fact that the rules change frequently, well into the first months of the year, and some states still accept paper filings (while others have pivoted only to digital channels), and companies must find ways and means to make sense of it all and reduce their tax reporting burdens.

Relying solely on the states’ systems may be a hurdle to easing those pain points, as only two-thirds of states have fully modernized their tax reporting systems, which means a sizable percentage of states have not.

“Some states are in the early stages of testing those new systems, so the impact of the technological changes are not yet known,” Walker said.

Companies should examine the benefits of partnering with providers such as Sovos to streamline connectivity and compliance, while outsourcing the burden of keeping up-to-date on the constantly shifting tax reporting landscape, she said.

“Having a provider that can ingest the data, transform it into various state tax outputs and into the IRS combined federal and state filing formats takes on that burden for your organization instead of you doing it all yourself,” she said.

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As Wendy Walker, solution principal at Sovos, told PYMNTS, the Internal Revenue Service’s ongoing digitization efforts pose challenges — and benefits — for enterprises switching from paper-based filing and processes.

“Like any large business, the IRS has a vast portfolio of operating systems,” Walker said. The agency relies on more than 40 mainframe systems, over 900 mid-range systems and close to 3000 vendor-supplied applications.

Some of those legacy applications and systems, she observed, are decades old — stretching as far back as the 1960s. Some of them still operate with “green screen” terminals.

The antiquated operations mean that there’s still a significant amount of time and resources spent entering data manually, and there’s still a huge amount of paper in the mix.

As the National Taxpayer Advocate Erin Collins said to Congress in 2022, and as recounted by Walker: Paper is kryptonite to the IRS — and it’s buried in it.

In addition to millions of income tax returns and employment tax returns, the IRS receives over 5 billion information returns annually, in the form of 1099s and W-2s. While most of them are filed electronically, there are still tens of millions of information returns filed via paper submissions.

Striving Toward Modernization

Little wonder, then, that beginning in 2019, the “system modernization journey” — as Walker termed it — took root with the Taxpayer First Act (TFA). Congress mandated that the IRS would have to “reimagine” the taxpayer experience — with 45 provisions that restructured the IRS and charted a path toward improving all manner of taxpayer interactions, including updating systems and  processes.

To modernize the intake of 5 billion information returns, the TFA mandated that the IRS build a new 1099 reporting system and with help from annual appropriations.

Last year, the IRS debuted the Information Return Intake System (IRIS), an online 1099 filing system that allows filers to manually create and electronically file 1099 returns. However, the system is not yet ready to take in billions of information returns electronically. Businesses with hundreds to millions of returns to file need a more streamlined method.

With help from Inflation Reduction Act funding, the IRS has been working to build application programming interface (API) connectivity since last year. The benefits of modernizing this transfer of data include reduced errors and faster processing times.

“Being able to click a button within an application and have it send that information directly is going to take a lot [of inefficiencies] out of that filing process,” Walker said. In addition, the IRIS platform alerts filers in real time whether critical information is missing or invalid from the returns, including incorrect taxpayer identification numbers.

For corporations (especially the firms that make up Sovos’ client base), and for financial services firms in particular, the IRS’ efforts may have a ripple effect.

“With respect to the IRIS system,” she said, “it’s a huge shift for the industry.”

Enterprise accounting systems like SAP and Oracle and core payment and financial services platforms like Fiserv and FIS all have built-in programming for generating the current IRS 1099 file format. States require information return reporting, and most rely on the legacy FIRE (that’s “filing information returns electronically”) system, a network used for processing filing forms.

“Organizations need to think about how the IRS is moving all of us over to IRIS and away from the legacy systems,” including the already-in-place FIRE, said Walker, because IRIS requires different filing formats and processes.

She advised that companies should consider implementing a project team to help manage those operations and technology changes. The transition may be especially challenging if the IRS decides that it will not continue to support some of the information return types on FIRE, forcing a filer to file return information in both IRIS and FIRE to comply with annual filing requirements.

In the months ahead, she said, paperless initiatives will continue to be a top priority at the IRS, and there will likely be more legislation from Congress mandating more eFiling initiatives and technological  innovations.

“You have to think from an organizational perspective about how you’re going to change over those systems and processes and procedures, and what those impacts are to everybody in between … and be prepared to respond on your timeline as an organization and not hopefully on the IRS’,” she said.

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The new Indirect Tax Suite is part of the Sovos Compliance Cloud and helps enterprises manage all their indirect tax obligations with governments, buyers, suppliers and consumers, the provider of compliance solutions said in a Tuesday (April 30) press release emailed to PYMNTS. 

“With the Sovos Indirect Tax Suite, companies can rely on the only comprehensive, global, always-on suite of integrated services in the industry to proactively manage compliance, benefiting from a single source of truth for tax data,” Kevin Akeroyd, CEO at Sovos, said in the release.

This new solution from Sovos can be embedded into existing workflows of more than 70 of the most widely used enterprise resource planning (ERP) and transaction management systems and can be seamlessly connected to government tax authorities across the globe, according to the release.

It provides automated tax rates and rule updates; adds transaction compliance to accounts receivable (AR) and accounts payable (AP) processes; and provides filing, reporting and insights, per the release.

The Indirect Tax Suite is designed for companies operating across multiple markets or looking to enter new ones, Akeroyd said in the release. It helps them meet the challenges of variations in tax rates and rules, wide-ranging reporting cadences and different requirements for documenting and storing transaction data.

“Keeping up with all of this is a tremendous drain on resources, especially when using multiple, disconnected point systems for different obligations or in different countries,” Akeroyd said.

With over 19,000 tax jurisdictions worldwide, each undergoing constant changes, the complexity of staying compliant has never been higher, and businesses are being compelled to embrace digital solutions, Akeroyd told PYMNTS’ Karen Webster in an interview posted Monday (April 29).

“Compliance has traditionally been a cost center designed to avoid risk and ensure compliance,” Akeroyd said. “It has not been a force for growth — but now, it’s turning that corner, and it really can be a force for growth.”

In another recent move, Sovos said April 15 that it enhanced its Sovos Partner Network to make it easier for partners to access new opportunities in technology, revenue and marketing. This program centers on the Sovos Compliance Cloud.

For all PYMNTS B2B coverage, subscribe to the daily B2B Newsletter.

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The legislation would cover companies’ digital services revenue made from Canadian users, imposing a 3% tax on the revenue above 20 million Canadian dollars (about $14.5 million), Bloomberg reported Wednesday (April 17).

It would apply only to companies with annual worldwide revenue about $1.1 billion Canadian dollars (about $800 million), according to the report.

This proposed tax would begin to apply to calendar year 2024, would cover taxable revenues back to Jan. 1, 2022, and is expected to raise about 7.2 billion Canadian dollars (about $5.2 billion) over five fiscal years, the report said.

Because it would primarily hit U.S. firms, including Alphabet and Meta, American lawmakers have called for trade reprisals if the legislation is passed, per the report. Business groups in both the U.S. and Canada have also spoken out against the bill.

The Canadian government has noted that at least seven other countries — including the United Kingdom, France, Italy and Spain — already have similar taxes, according to the report.

Finance Minister Chrystia Freeland has said that the Canadian tax would not be enacted if a global tax treaty through the Organization for Economic Co-operation and Development were implemented, but that treaty has not yet been implemented by the U.S., per the report.

The move is expected to level the playing field for domestic companies competing against the tech giants.

Among the business groups opposing the legislation are the American Chamber of Commerce in Canada, the Canadian Chamber of Commerce and the U.S. Chamber of Commerce.

The groups issued a joint statement in February saying that the tax would be retroactive, discriminatory and in contravention of prevailing international tax principles.

“In both Canada and the United States, the livelihoods of our workers and the prosperity of our citizens depend on the North American Trade and investment partnership,” the joint statement said. “At such a sensitive time in the trade relationship, we hope Members of Parliament remain committed to multilateralism and the importance of a common approach to the North American marketplace.”

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The launch, announced Wednesday (April 10), makes it easier for customers and partners to connect to Sovos’ Compliance Cloud. 

These connectors help companies implement Sovos’ tax compliance and regulatory reporting solutions into their enterprise financial systems, doing away with compatibility issues and ensuring data security and always-on compliance, the company said in a news release. 

Sovos noted that government mandates around the world are forcing its customers and partners to meet new compliance standards, which can be tough for businesses that are running disparate systems and may not have the resources to develop connectors and APIs. 

“Customers need the ability to connect to our solutions without significant development cycles to quickly meet changing business requirements,” said company CEO Kevin Akeroyd. “This is a core tenet to everything we do at Sovos.”

PYMNTS discussed the tax compliance changes facing businesses last month in a conversation with Steve Sprague, chief strategy and product officer at Sovos.

As he told PYMNTS, there was a time when corporate back offices were content to use legacy accounting systems and may have assumed that those systems will extract a “big enough file” to cover all of the diverse markets and tax reporting requirements around the world — from the U.S. to Brazil to Germany — depending on the scale of the company.

But now, he added, these organizations must deal with a third party operating “inside” the company: the government.

One of the most notable trends in tax policy, Sprague said, has been the movement of governments toward transactional collection via continuous transaction controls (CTCs), especially in Latin America and Europe. That’s a notable change, he added, from what’s traditionally been seen before, primarily in the U.S.

“Many individuals,” Sprague said, “viewed tax as something that happens on a quarterly basis or an annual basis. But around the world, it’s been moving from not only quarterly, but monthly … now it’s in real time.” 

Governments are collecting companies’ invoices in real time, gleaning insight into those enterprises’ billing and accounts payable processes.

Also last month, Sovos teamed with PwC in Belgium to streamline the adoption of eInvoicing among businesses.

This partnership establishes a joint business relationship designed to improve the implementation of eInvoicing and eReporting solutions, the companies said.

“As companies navigate an increasingly interconnected and dynamic marketplace, the need for a more integrated eInvoice process has never been more crucial,” Ellen Cortvriend, partner at PwC in Belgium, said in a news release.

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