Your Guide to Sales Tax in the Midwest
When it comes to sales tax, there is no such thing as “fly over states.”
If you have business operations in the Midwest or make sales into Midwestern states, you must stay on top of sales tax changes that impact your business, or you risk falling out of compliance. You can’t blame ignorance of law changes when an auditor arrives.
To catch you up and cut down your research time, we’ve compiled some of the essential Midwestern sales tax trends for 2024 that you need to know.
Exemptions for Business Technology
Sales tax helps fund education, healthcare, infrastructure, and more across the United States. Each of the States have their own financial goals, and in order to reach their goals, they have over the years created different types of exemptions. But when the incentive is no longer serving the needs of the state, they can just as easily repeal or put additional requirements on businesses that are claiming the incentive.
Let’s take a look at this concept in practice, starting in Iowa. Starting January 1, 2024, there will be changes to Iowa’s sales tax exemptions for certain businesses buying computers and computer peripherals. Until December 31, 2023, insurance companies, financial institutions, and some commercial enterprises enjoyed a tax break when purchasing these items for handling data or information storage. However, due to Section 41 of the 2022 Iowa Acts, Senate File 2367, this exemption will end. From January 1, 2024, these purchases by the mentioned entities will be subject to Iowa sales and use tax.
Michigan recently updated a requirement that requires data center operators claiming sales or use tax exemptions for equipment sales or purchases to report annually using Form 5726. The state’s goal being to assess the financial impact on key funds like the School Aid Fund and General Fund. Compliance with Form 5726 helps evaluate the impact of tax exemptions on state revenue and maintains transparency in fund allocation. This could lead to either a constriction or expansion of the exemption.
States Dropping the 200 Transactions Threshold for Economic Nexus
In response to discussions during the Senate Finance Hearing on the impact of Wayfair on small businesses in 2022, states are evaluating the elimination of the 200 transaction part of their economic nexus threshold. This reduces the burden on small businesses and helps the state focus on businesses generating enough revenue in the state to support compliance costs.
Iowa and Wisconsin repealed this provision back in 2019 (Iowa) and 2021 (Wisconsin). Indiana has passed legislation (pending Governor signature) effective retroactively for January 1, 2024 which drops this component. These changes follow the trend of states removing their 200-transaction threshold, including South Dakota, the state that first enacted the threshold, which passed legislation to drop their transaction threshold last year. Other states around the country that have removed the transaction count from their economic nexus thresholds include Colorado, Washington, and more. This is good news for smaller remote sellers making sales into these states whose sales don’t exceed $100,000 in a calendar year but whose transaction count exceeds 200. This follows similar developments in. Stay up to date on the updates by using our Economic Nexus State by State Guide.
This trend follows the Senate Finance Committee Testimony given by Diane Yetter, our founder, in June 2022. In her testimony, she explained the compliance burden the 200-transaction threshold puts on the smallest of sellers. It was based on this testimony in part that led the Streamlined Sales Tax Governing Board to encourage all the member states that still use the 200-transaction threshold to remove it. South Dakota is taking a leadership role in this effort, and we hope all the other states, not just the SST member states, follow suit, and eliminate this burden.
Sales Tax Exemptions for Personal Hygiene and Baby Products
Taxpayers are getting more and more opportunities to save sales tax dollars as states implement sales tax exemptions for essential products. Two essential products seeing new exemptions are personal hygiene and baby products.
For example, the Ohio governor signed a budget bill that included several changes to the state’s sales tax exemptions which were effective October 1, 2023. The amendments are aimed at providing tax relief for families with young children. The budget bill introduces new sales tax exemptions on various children’s products.
Wisconsin introduced a few bills in 2023 that would create widespread exemptions for both personal hygiene and baby products. Examples of baby products include baby monitors, child safety cabinet locks, diapers, breast pumps, and much more. Get more details about these exemptions (and look beyond just the Midwest!) by reading Avalara’s article, “States may get rid of “pink taxes” in 2024.”
Easing the Sales Tax Burden on Online Sellers
Another trend sales tax pros are seeing everywhere is states trying to make online sellers’ lives easier when it comes to sales tax! Economic nexus increased the number of taxpayers require to comply with sales tax laws across the states. In fact, the Streamlined Sales Tax organization, which is made up of a number of Midwest states, has over seven times the number of registrants than they had in 2018 before the Wayfair decision was issued. Many states have been improving their online access to help make it easier for the people who register with them to give them money.
Their efforts include making their rules more understandable to the average person to increase compliance rates and reduce uncertainty faced by taxpayers. You may have noticed that many states are changing their online portals and publishing helpful information for remote and marketplace sellers.
Many More Sales Tax Updates Happening in the Heartland
These are just a taste of the critical updates that could have a significant impact on your Midwest operations when it comes to sales tax. You should always keep your eyes peeled for sales tax updates coming out of the United States’ heartland.