Governments will reexamine a host of state policies coming off an unprecedented year with building budget challenges. Sales tax is one area that will certainly be on the table as legislatures make difficult decisions about taxes and spending.
Many states have already made bold moves when it comes to sales tax in 2021. Changes to sales tax laws can be a unique intersection of policy and politics – as states can decide who new sales tax rules can be imposed on and how new sales tax funds can be used.
Professionals tasked with keeping their companies and clients sales tax compliant must be prepared to manage changes in the landscape in stride. Here are some of the fund-recovery trends to watch out for that will have continued implications for sales tax pros throughout 2021 with insight from some of the top minds in sales tax today.
States across the board experienced sales tax revenue declines throughout 2020. Differences exist, of course, among how much each state relies on sales tax as part of their mix of tax revenue.
In 2021 and beyond, states may increasingly attempt to increase the reliance on sales tax as a proportion of overall state tax revenue. Expanding sales tax bases and increasing sales tax rates are two common ways to accomplish this and many states are already proposing new measures in these areas. “Whether a politician believes the sales tax is better than other taxes or if they just need more money, expanding the sales tax to services or increasing the rate is a commonly debated idea” says Scott Peterson, the Vice President of U.S. Tax Policy and Government Relations at Avalara.
For example, the West Virginia Governor unveiled a plan to repeal the individual income tax as a way to grow the state’s declining population. Lost income tax revenue would be made up by increasing the state’s base sales tax rate, adding a single-item luxury tax for certain high-value items, expanding the sales tax base to include new services, and hiking up taxes on tobacco, alcohol, and soft drinks.
|“Whether a politician believes the sales tax is better than other taxes or if they just need more money, expanding the sales tax to services or increasing the rate is a commonly debated idea. Creating new taxpayers out of service providers with no understanding of sales tax will require serious effort from their tax professionals.”
– Scott Peterson, Vice President of U.S. Tax Policy and Government Relations, Avalara
Expanding state sales tax bases to include more services and rate increases are not new ideas but they carry a different weight as revenue-hungry states look ahead to the post-pandemic world. Sales tax professionals can expect new hills to climb in the coming months when it comes to getting their company or clients compliant in light of new or increased sales taxes.
“2021 will likely offer legislative and regulatory proposals incorporating equal elements of politics and policy” says Charles Maniace, Vice President of Regulatory Analysis and Design at Sovos, “A great example is the recently enacted laws in Maryland taxing digital advertising and digital products.”
Digital advertising taxes started making a splash in the U.S. last year when Maryland first proposed its digital advertising tax. The bill was vetoed by the Maryland governor in 2020, but the Maryland legislature overrode the veto in February 2021, making Maryland the first state in the country to adopt a tax on digital advertising.
This tax, imposed at rates ranging from 2.5% to 10% on gross revenue from digital advertising in Maryland, has not come without controversy. The U.S. Chamber of Commerce and groups such as the Internet Association, whose members include Amazon, Facebook and Google, have already filed a lawsuit over the new legislation. Critics believe that the law violates the federal Permanent Internet Tax Freedom Act, which prohibits new taxes on Internet access fees and discrimination of electronic commerce and presents other constitutional issues.
|“2021 will likely offer legislative and regulatory proposals incorporating equal elements of politics and policy. A great example is the recently enacted laws in Maryland taxing digital advertising and digital products. While the Maryland Digital Advertising tax may not pass Constitutional muster, those of us responsible for keeping our organizations compliant need to be ready for almost anything.”
– Charles Maniace, Vice President of Regulatory Analysis and Design, Sovos
Despite growing legal issues and criticism for being “unworkably vague” in terms of key definitions and the types of transactions that should be taxed, a flurry of other states including Connecticut, District of Columbia, Indiana, Massachusetts, Montana, Nebraska, New York, and West Virginia, are following in Maryland’s footsteps and have introduced digital advertising bills of their own over the past year.
Maryland is also one of several states that recently expanded their tax base to include digital goods like e-books, digital code, streaming, and music. The state is also considering canned software, electronically delivered software, and software as a service taxable as digital goods. As states try to tax more digital products and services, they must figure out what tax should apply: A telecommunications tax? A data processing tax? An amusement tax? This trend certainly isn’t going to help uniformity issues across the states unless states are SST members who follow uniform definitions for digital goods.
When marketplace facilitator legislation first started being introduced, the most obvious examples of marketplace facilitators were ones that operate platforms that sell tangible goods like Amazon and eBay. However, states are catching up with the technological reality of the day and clarifying which types of businesses are considered marketplace facilitators and which types of taxes they must collect.
Even with these clarifications happening, differences between state approaches to marketplace facilitator laws abound. “The inconsistency of state laws regarding marketplace facilitators is frustrating for not just the facilitator, but also the seller and the customer,” says Diane Yetter, President of Sales Tax Institute, “States differ in whether the facilitator is responsible for just the general sales tax or if other taxes are included and if more than one tax type applies to an order and it is not included, this adds significant confusion to all parties.”
In many states, specialized taxes like meals, liquor, amusement, lodging, and local taxes now fall under the marketplace nexus umbrella. Marketplace facilitators can be held responsible for the collection and remittance for these taxes depending on their business.
You may not realize that ridesharing companies like Uber and Lyft, food delivery companies like DoorDash and Grubhub, and short-term lodging rental companies like Airbnb and Vrbo may all meet the classification of “marketplace facilitator” in various states.
|“The inconsistency of state laws regarding marketplace facilitators is frustrating for not just the facilitator, but also the seller and the customer. States differ in whether the facilitator is responsible for just the general sales tax or if other taxes are included and if more than one tax type applies to an order and it is not included, this adds significant confusion to all parties. There is model legislation passed by the National Conference of State Legislatures (NCSL) but unfortunately after most states enacted their provisions so it is less likely we will see broad adoption.”
– Diane Yetter, President and Founder, Sales Tax Institute
Airbnb and other rental marketplaces were targeted throughout 2020 under the suspicion they weren’t paying in state and local tax. Some states are bringing short-term rental marketplaces into existing marketplace facilitator laws regarding local occupancy taxes.
2021 is already a unique year legislatively. There is a lot of ground to make up from 2020 to push new legislation through and recoup revenue after a year of setbacks due to the pandemic.
Sales tax pros, stay on your toes!