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As a new economic cycle unfolds, some changes are appearing on the horizon. States have been thorough in reassessing their sales tax policies to make positive changes for taxpayers. A lot of bold tax changes were proposed in the 2022 legislative session, and the same is to be expected of 2023.
Professionals tasked with keeping sales tax compliance must be prepared to manage changes in the landscape in stride. With insight from our sales tax experts, we examine three 2023 sales tax trends you should know that could have big impacts on your operations.
Sales tax trends often spread through specific regions before reaching across the country. One example of a trend that is expanding in the Northeast region is the development of consumer data collection taxes (and related digital advertising taxes).
Maryland was the first to seriously play with the idea of digital advertising taxes over the last couple of years. Massachusetts and New York later considered an excise tax on annual revenue from digital advertising, but their ideas have recently shifted. To replace the digital advertising tax, these states are looking into collecting tax on the revenue from selling consumer data. Massachusetts has proposed a monthly tax on collection of consumer data of Massachusetts’s consumers by commercial data collectors and on selling personal information
Do these have a greater chance at success than the digital advertising taxes? Taxing these transactions as information services or data processing tax structures could give them a better shot.
One of the challenges in taxing digital advertising is a violation of the Internet Tax Freedom Act. Physical advertising is typically not taxed (other than sometimes billboards as rental of property) and so taxing digital advertising results in taxing something that isn’t taxed in its physical form. Approaching the desire to tax something related to digital advertising through data tax could be more successful in states that already tax data processing or information services.
States are realizing their sales tax regulations are in need of simplification and uniformity especially when it comes to economic nexus. One-way states could make the lives of taxpayers easier is to eliminate economic nexus transaction thresholds and solely use a dollar threshold amount. Different states could use different dollar amount thresholds based on size. This was a significant point discussed in the Senate Finance Committee Hearing on the Impact of Wayfair on Small Business and Remote Sellers. In addition, the GAO Report found that the use of transaction counts in determining whether a remote seller establishes nexus adds a significant burden to small businesses.
Over the last few years, we’ve seen some states eliminate the transaction count threshold (Colorado, Washington, Wisconsin and Maine are a few) as well as others that enacted legislation without any transaction threshold (Florida, Missouri, New Mexico are a few). South Dakota is the first state to consider the elimination of their economic nexus threshold since the Hearing and GAO report. As an SST member state and the named case in the Wayfair decision, South Dakota has decided to take a leadership position and is encouraging other Streamlined Sales Tax States to eliminate their economic nexus transaction thresholds.
How does this impact people and businesses? This would have a significant impact on smaller businesses – particularly those that don’t sell on Marketplaces. There are many clients we work with that are well below the economic dollar threshold but due to the 200 transaction threshold, they are required to register. Elimination of this component of the threshold will significantly reduce the burden on these sellers.
Variations of new sales tax exemptions related to items that are considered to be necessities have been trending and increasing in popularity across the country. Personal hygiene, diapers, and groceries are the top three. Over the last few years, we’ve seen a push against the “pink tax” resulting in the elimination of tax on feminine hygiene products since this disproportionately impacted women over men.
Grocery food (unprepared food for human consumption) has been exempt or partially exempt in many of the states. However, in the last few years, states that have been reluctant to exempt food are now moving forward. Last year we saw Kansas enact a phase out of their tax on grocery food. Virginia has issued a bulletin discussing the state’s exemption for food purchased for human consumption and essential personal hygiene products. Effective January 1, 2023, Virginia’s 1.5% state level sales and use tax levied on food and essential personal hygiene products is eliminated and will continue to be exempt from all regional and additional local tax rates. However, food and essential personal hygiene products will still be subject to the 1% local option tax. Colorado and Wisconsin are also among the states enacting these exemptions beginning in 2023. South Dakota Governor Noem promised that her number one priority for the 2023 legislative session is eliminating the 4.5% state sales tax on groceries. 37 states do not levy a sales tax on food. Currently, South Dakota is one of only three states that tax groceries at the full sales tax rate without any offsetting tax credit.
The elimination of tax on necessities certainly lessens the regressive nature of the sales tax. However, narrowing the base raises other questions and concerns specifically related to the need to raise sales tax rates to offset the narrowing on the base.
As you can see, 2023 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 the imminent sales tax changes while managing your day-to-day job requirements. And understandably so!