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As a new economic cycle unfolds and some hope appears on the horizon as public health improves, states have the means (the pandemic did not result in nearly the state budget deficits anticipated) to reassess their sales tax policies to make positive changes for taxpayers. Important sales tax simplification measures from 2021 will continue to unfold this year and many states have already proposed bold tax changes in the 2022 legislative session.
Professionals tasked with keeping their companies and clients sales tax compliant must be prepared to manage changes in the landscape in stride. With insight from four sales tax experts, we examine four 2022 sales tax trends you should know that could have big impacts on your operations.
Challenges to economic provisions have popped up since the South Dakota v. Wayfair case was decided in 2018. The final months of 2021 brought resolution to a few of these challenges. A California federal court threw out an attempt by the Online Merchants Guild, an e-commerce trade group, to stop California from pursuing back sales taxes from Amazon sellers with inventory in in-state Amazon fulfillment centers. However, this might resurface in state courts.
A challenge to Massachusetts’s infamous “cookie nexus” was resolved in the taxpayer’s favor. The Massachusetts Appellate Tax Board ruled that Massachusetts Department of Revenue could not retroactively impose a collection responsibility pre-Wayfair and that electronic cookies do not constitute physical presence. Rumor has it that Massachusetts will appeal, so we’ll keep an eye on this. Until then, any taxpayer who has paid tax (particularly out of pocket) should file a refund claim.
The most intriguing challenge to economic nexus was presented in late 2021. An Arizona jewelry company brought forward a case to challenge to the complexity of Louisiana local sales tax law. In Halstead Bead v. Lewis, Halstead Bead declares that Louisiana’s requirement that out-of-state sellers register and file reports with every Louisiana parish as an undue burden on interstate commerce and a violation of due process.
“It will be interesting to see if states react via legislation or regulation to the litigation challenging the validity of existing economic nexus standards in places like Louisiana.” – Charles Maniace, Sovos
In January, the Louisiana Department of Revenue asked a federal court to dismiss the challenge, arguing that Halstead Bead lacks the standing to pursue this action and that the state’s tax regime doesn’t discriminate against interstate commerce.
Will other companies be empowered to challenge remote seller complexities in other tricky states like Colorado? We will closely watch the Halstead case unfold and monitor any other legal developments.
“Whatever one may think of the merits of the complaint in Halstead Bead v. Lewis, there are definitely some steps states can take to further simplify their sales tax requirements without re-writing their tax laws,” stated Charles Maniace, Vice President of Regulatory Analysis and Design at Sovos, “Florida eliminating their sales tax brackets is an excellent example.”
Many states still have work to do clarify and simplify requirements for remote sellers. Which leads us to our next trend…
Adjustments to sourcing rules and other structural changes to state tax regimes is a trend towards that we expect to continue into 2022. This trend is particularly important to remote sellers navigating requirements in new states for the first time.
We’ve seen many examples of these types of changes over the past year. The Illinois “Leveling the Playing Field for Illinois Retail Act” went into effect at the beginning of 2021, making a change from origin to destination souring for remote sellers for the state’s unique retailer’s occupation tax (ROT) and local ROT.
Ironically, the name of the Act – Leveling the Playing Field – didn’t make Illinois taxes easier for anyone. According to Diane Yetter, Founder of the Sales Tax Institute, “Prior to January 2021, remote sellers were only subject to the state use tax at 6.25%. In-state sellers only had to collect tax based on their location as Illinois is an origin-based state. With this change, remote sellers must collect the sales tax (ROT) at the destination, forcing them to know every rate for every jurisdiction in Illinois. This didn’t level the playing field, it put remote sellers at a significant disadvantage to in state sellers—which happens to be unconstitutional!”
“With this [Illinois sourcing rule] change, remote sellers must collect the sales tax (ROT) at the destination, forcing them to know every rate for every jurisdiction in Illinois. This didn’t level the playing field, it put remote sellers at a significant disadvantage to in state sellers—which happens to be unconstitutional!” – Diane Yetter, Sales Tax Institute
New Mexico switched to destination-based sourcing for both in-state and out of state sellers as of July 1, 2021. Previously, remote sellers were required to collect only the statewide use tax rate on online sales to customers in New Mexico, and New Mexico businesses were required to pay the local rate at their business location.
Effective October 1, 2021, Texas changed the sourcing of internet-based transactions for Texas retailers, shifting them from an origin-based to a destination-based sourcing model. This change has faced some local legal challenges. The change to the sourcing rules is on hold pending the outcome of the case which is scheduled to begin the week of June 13, 2022.
An update coming out of the 2022 legislative session is that a bill in Colorado has been signed that extends sales and use tax destination sourcing rules for in-state businesses with less than $100,000 in retail sales until October 1, 2022. It was previously set to expire February 1, 2022.
Should individuals’ consumption or earnings be taxed? This is the historical question behind state policy decisions in how tax revenue should be generated. Many states are revisiting this question in light of an unexpected scenario: widespread budget surpluses.
The onset of the coronavirus pandemic in 2020 spurred significant uncertainty and a gloomy outlook for those in charge of state budgets. However, states have overwhelmingly weathered the storm. As reported by the National Association of State Budget Officers, in 2021, forty-seven states reported that their general fund revenue collections were higher than their original budget predictions.
Economic uncertainty remains but states are now in a position to more comfortably reevaluate which sources of revenue they want to rely on going forward.
“As a policy matter, states are increasingly looking to withstand significant economic cycles in the U.S. which can profoundly affect state and local revenues. Sales and gross receipts taxes generally weather these storms better than income tax,” said Michael Bernard, VP of Tax Content and Chief Tax Officer of Transaction Taxes at Vertex. “In addition, they provide monthly revenue streams and are easier to administer from a government perspective. Any proposal by state houses or governors to promote sales and gross receipts taxes in addition or in lieu of an income tax, should be taken seriously.”
And there are a number of proposals to keep your eye on this year! States across the country are considering both state income tax and corporate income tax reductions and phase outs. Mississippi’s proposed legislation would shift more revenue generation reliance to sales tax with a proposed sales tax increase and an elimination of individual income tax.
“As a policy matter, states are increasingly looking to withstand significant economic cycles in the U.S. which can profoundly affect state and local revenues. Sales and gross receipts taxes generally weather these storms better than income tax.” Michael Bernard, Vertex
On the flip side, 2022 already has a historic air to it given the number of proposals for state level sales tax rate decreases. Idaho, New Mexico, South Dakota, Washington, and West Virginia all have proposed legislation that would reduce their state sales tax rates. We will see if these proposed decreases result in state income tax swaps. Idaho has already enacted legislation effective retroactively to January 1, 2022, reducing the corporate and individual income tax rates.
Beyond shifts in the types of taxes states are choosing to rely on for revenue, the 2022 legislative session has made it clear that legislators are interested in and open to shifts within tax types through expansions or contractions in the tax base.
“Perhaps never have states had so much money in reserve while having ever increasing tax collections. It should be of no surprise that state legislators and governors are debating ways of changing their tax structure,” said Scott Peterson, Vice President of U.S. Tax Policy and Government Relations at Avalara, “Whether that is exempting diapers from the sales tax, exempting retirement income from their personal income tax, or completely repealing their corporate income tax. Nearly every state is having the same conversation differing only by the tax type and the amount in question.”
We’ve previously seen lobbying against the upcharge or “pink tax” on products geared towards women, with many legislative proposals in recent years to provide a tax exemption on a portion of these items that are essential to women’s health, such as menstrual products.
“Perhaps never have states had so much money in reserve while having ever increasing tax collections. It should be of no surprise that state legislators and governors are debating ways of changing their tax structure.” – Scott Peterson, Avalara
The trend this year in the personal medical care category is a tax exemption for diapers, both children and adult. Alabama, Arizona, Colorado, Maryland, Missouri, New York, Oregon, and Washington have all introduced bills in 2022 to exempt diapers from tax. A few also contain provisions to exempt other baby supplies and menstrual products.
Tax on groceries is also a popular target for cutting rates or removing the tax altogether. The Mississippi proposed legislation to eliminate individual income tax and increase sales tax also contains provisions to reduce the sales tax rate on food from 7 to 5 percent. Alabama, Kansas, Idaho, Missouri, and Oklahoma have proposed legislation to eliminate state sales tax on groceries. In an annual budget address, the Illinois governor laid out a plan that would include a one-year suspension of the state’s 1% sales tax on groceries. The outgoing Virginia governor also called for an end to the state’s tax on groceries at the end of 2021.
As you can see, 2022 is already poised to be a unique year for sales tax changes. It can be quite difficult for sales tax pros to stay ahead of all of the imminent sales tax hurdles while managing your day-to-day job requirements. And understandably so!