No region of the United States is immune from a continuous stream of sales tax updates,
Regions across the U.S. experience a continuous stream of sales tax updates each and every week. The Northeast is no exception. One of the biggest challenges sales tax professionals face is keeping up with all these changes.
Because states are often influenced by neighboring states’ approaches to sales tax, it can be helpful to look at regional trends to start getting a handle on your sales tax obligations and to predict which states might adopt a similar policy next.
To help those with business operations in the Northeast or those who make sales into Northeastern states keep up, we’re putting a magnifying glass on some of the key recent Northeastern sales tax changes.
There is a concentration of states in the Northeast that exempt clothing from sales tax either partially or in full. Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont all generally exempt clothing from sales tax, but with their own twists. For example, Massachusetts and New York don’t tax most clothing up to a certain amount per item.
The face mask is THE apparel item of 2020. How are states treating masks for sales tax purposes? Is a face mask clothing? What about an accessory? Or is it considered protective wear? Most states with clothing sales tax exemptions do not include accessories or protective clothing/devices/equipment in the exemption.
Given that seemingly every retailer under the sun now sells their own version of a face mask, some states are stepping up to fill in definition gaps to clarify the taxability of face masks. Pennsylvania provided update guidance to indicate that cloth and disposable face masks are exempt from sales tax. Prior to the COVID-19 pandemic, masks sold at retail were typically subject to Pennsylvania sales tax. Pennsylvania states that masks could now be considered everyday wear/clothing as they are part of the normal attire. This change was in response to some class action lawsuits filed against retailers who were following the law as it existed. In fact, the law hasn’t been changed so there is still uncertainty about the correct taxation in Pennsylvania.
In May, Massachusetts introduced H. 4760 to create a sales tax exemption for protective facial coverings, including face shields and masks. The Massachusetts bill was introduced shortly after the Massachusetts DOR issued guidance stating that generally, businesses should collect tax on sales of face masks. The House Committee on Revenue is charged to complete an investigation and study of the bill and other COVID-19-related bills, with recommendations due December 31.
In July, New York introduced Senate Bill S8715, which would exempt protective face masks or shields worn to help slow the spread of COVID-19 from sales and compensating use taxes. The bill is still in committee.
Most Northeastern states (those with a sales tax anyway) implemented marketplace facilitator legislation by the end of last year. Passing legislation is one thing, putting the requirements into practice for businesses of all kinds is another. Several states in the Northeast issued guidance over the past several months to clarify their rules for marketplace facilitators.
The District of Columbia issued a notice regarding the sales tax treatment of restaurant food and drink made through a marketplace facilitator. Marketplace facilitators that take orders and accept payment for delivery or pick-up at a restaurant are required to collect sales tax from customers and remit tax to the D.C. Office of Tax and Revenue. That means all the platforms like DoorDash, Grubhub, and Uber Eats that everyone has been ordering their comfort food through over the past several months are required to collect tax.
Sourcing for sales tax can be tricky for any business. Ohio revised an information release to help marketplace facilitators understand sourcing rules for their sales. According to the new guidance, marketplace facilitators are required to source sales they facilitate to the location where the customer receives the property/service that is sold – aka destination sourcing. However, for a marketplace facilitator’s direct (non-facilitated) sales, if the order is received in Ohio, the marketplace facilitator will source the sale to the location where the order is received.
Marketplace facilitators in the telecommunications industry will be required to collect the Universal Service Charge on retail sales of prepaid wireless telecommunications services in Vermont, effective July 21, 2021. Vermont’s Universal Service Charge is imposed on consumers in order to fund improvements to broadband internet service and to keep it affordable for state residents. The charge is in addition to the state sales tax and is calculated as 2.4% of the retail charge on all wireless telecommunication sales.
It’s no secret that 2020 has been a year full of day by day decision making in reaction to the current environment. Tax Departments across the Northeast have developed new webpages to house their decisions and policies related to the COVID-19 pandemic. There has been a regular stream of updates impacting sales tax since March.
Several states extended the deadlines for businesses to remit sales tax. Connecticut extended the deadlines for its February, March, and April sales tax returns for qualifying taxpayers to June 1, 2020. The District of Columbia extended its sales and use tax filing and payment deadline, for the February and March 2020 periods, to July 20, 2020.
Most recently, in Massachusetts, vendors whose cumulative liability in the 12-month period ending February 29, 2020 is less than $150,000, returns and payments otherwise due during the period beginning March 20, 2020 and ending April 30, 2021, shall be suspended. All returns and payments related to this period are due May 20, 2021 – extended from the previous deadline of September 20, 2020 (which was extended from June 20, 2020). The suspension does apply to marketplace facilitators or motor vehicle vendors.
Given the close proximity of major cities in Northeast states and the propensity of residents to commute across state lines for work, some Northeast states have relaxed nexus provisions related to remote employees working from home during this time.
New Jersey and Pennsylvania will not count temporary remote employees toward nexus thresholds. These states have a Reciprocal Personal Income Tax Agreement not to tax the wages of a resident of the other state. During the COVID-19 pandemic, wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction. Philadelphia issued guidance stating that non-resident employees who work for Philadelphia-based employers are not subject to the Philadelphia Wage Tax during the time they are required to work outside of Philadelphia.
The Rhode Island Division of Taxation will not seek to establish nexus for sales and use or corporate income tax purposes solely because an employee is temporarily working from home and/or is using property to allow the employee to work from home temporarily during the state of emergency. This policy is predicated on the condition that a company would not otherwise have nexus due to physical presence or economic nexus in Rhode Island.
For a list of resources to help you navigate the impact of COVID-19 on sales tax, visit our Coronavirus Tax Filing Relief & Resources.
Sales tax rule changes reflect changes happening in the world. A year ago, how states treat face masks for sales tax purposes would not have mattered as intensely as it does now.
When you work in sales tax, you have to be agile in order to quickly accommodate the many updates and changes states throw your way on a weekly basis.