The Southwest region of United States has a unique landscape known for its arid climate and rugged, yet beautiful terrain.
The sales tax landscape of the Southwest is unique too! It’s a region full of its own sales tax quirks and critical updates. If you have business operations in the Southwest or make sales to Southwestern states, you need to keep up with the constant stream of sales tax changes that may impact your business. Otherwise, you risk falling out of compliance!
What’s been happening in the Southwestern sales tax landscape lately? Let’s dig into some updates.
The Southwest is home to two states that do not have the typical transaction-based sales and use tax: Arizona with its transaction privilege tax (TPT) and New Mexico with its gross receipts tax.
The Arizona TPT is commonly referred to as a sales tax but is actually a tax on a vendor for the privilege of doing business in Arizona. If you do business in Arizona or with Arizona customers, there are several TPT admin updates that have come out in the past few months that you need to incorporate into your processes. As of January 1, 2021, Arizona lowered the threshold for TPT electronic filing and paying to $500, it was previously $5,000 during the 2020 calendar year. In another effort to move toward electronic processes, Arizona discontinued the mailing paper TPT returns to taxpayers, effective February 1, 2021.
The New Mexico gross receipts tax is also imposed on a seller for the privilege of doing business in the state rather than on sales (and the purchaser). The gross receipts tax is levied on the total amount of money/value received from a selling or leasing property, performing services, or other specified activities in New Mexico.
Effective July 1, 2021, New Mexico law will require that some businesses convert to destination-based sourcing for reporting gross receipts taxes. The destination-based sourcing method means taxpayers pay the tax rate in effect in the jurisdiction where their goods or services are delivered. Previously, New Mexico was an origin-based sourcing state where sales are taxed where the seller is located. The New Mexico Department of Taxation is currently working on regulations to administer the changes created by the new sourcing law, which was passed back in 2019. This change will also require out of state businesses to collect the GRT local option taxes in addition to the state rate.
It’s no secret that the strains of a global pandemic have been acutely felt in the restaurant business. In December of 2020, Colorado enacted legislation (HB20b-1004) that provided a temporary deduction from state net taxable sales for qualifying bars, restaurants, and mobile food service vendors. The temporary tax deduction related to that legislation was allowed for sales made from November 2020 through February 2021.
To provide additional relief, the Colorado legislature just passed HB21-1265, which would generally continue, for June, July, and August 2021, a temporary sales tax collection allowance for qualifying retailers in the alcoholic beverages drinking places industry, the restaurant and other eating places industry, or the mobile food services industry. The bill allows businesses to deduct from state net taxable sales the lesser of state net taxable sales or $70,000 and retain the resulting sales tax collected for each month in the specified sales period (June, July, and August 2021) as assistance for lost revenue resulting from the pandemic. The final text was released on June 10, 2021 and is awaiting governor signature to become law. This benefit only applies to the 2.9% state rate and not any of the city, county or special district taxes.
One of the more common types of sales tax exemptions you’ll see in many states is an exemption for manufacturing. What constitutes “manufacturing” will differ across the states, including the Southwest, so you must read state definitions carefully. Texas recently issued new guidance for its sales and use tax manufacturing exemption, outlining what types of tangible personal property and services qualify for the exemption. The manufacturing exemption only applies to machinery and equipment that physically or chemically change the product to make it saleable. Certain items involved in manufacturing processes, like hand tools, are not exempt. Make sure to evaluate whether specified items are defined as manufacturing based on their use, and therefore such items may be qualified as exempt in Texas.
States also carve out sales tax exemptions for activities they want to incentivize. For example, in May 2021, Oklahoma enacted an exemption on sales of tangible personal property to non-profit 501(c)(3) organizations that construct or remodel affordable housing for low-income residents or repair or restore homes following a natural or human-made disaster. This new exemption is effective November 1, 2021.
Louisiana has a pollution control device or system sales tax exemption to help protect the environment. A taxpayer case this spring pushed the Louisiana Board of Tax Appeals to clarify what types of caustic materials can qualify for the exemption. The taxpayer’s purchases of sodium hydroxide used to reduce the toxicity of their manufacturing waste to be in compliance with state and federal pollution control laws qualified as a pollution control device for the purposes of the exemption despite being a chemical.
These are just a handful of the critical updates that could impact your sales tax obligations for your Southwest business operations. These sorts of sales tax changes happen daily across the states and staying on top of them is critical if you plan to stay sales tax compliant.