Dealing with change is standard operating procedure for many companies. Employees leave and are hired; new products are introduced and old ones phased out; there are booms, and there are busts. On top of everything, companies need to account for sales and use tax changes. Significant changes in rates, regulations, and product taxability often take effect July 1, which is the start of a new fiscal year in most states.
At the end of 2016, we shared many of the sales tax changes set to occur January 1, 2017. These included state sales tax rate changes in California and New Jersey, the expansion of sales tax to certain services in North Carolina, the prohibition of taxing more services in Missouri, and a bevy of recently enacted soda taxes and tampon tax exemptions. At mid-year, we’re seeing a few propositions that signify a shift in online sales tax revenue.
States want to collect more tax revenue from remote sales
Perhaps the most notable trend of 2017 is states’ push to obtain tax revenue from remote sales. This isn’t new. States have been working to tax out-of-state sellers for years, but their efforts have been hampered by Quill Corp. v. North Dakota (1992) — the landmark Supreme Court ruling that a state can only tax businesses physically located within its borders.
In recent years, states have found creative ways to work around the physical presence precedent. They’re taxing businesses with ties to in-state affiliates and those that generate a certain amount of business through links on in-state websites (commonly known as click-through nexus). Increasingly, they’re also taxing companies with a certain amount of economic activity in the state (economic nexus). Unfortunately for states in need of additional sales tax revenue, these affiliate, click-through, and economic nexus laws are difficult for states to enforce.
Many states are looking for more aggressive approaches. Two methods in particular have been gaining steam this year: use tax notification and reporting requirements, and taxes on online marketplace providers such as Amazon and eBay.
Use tax notification and reporting requirements
Colorado paved the way for states to impose use tax notification and reporting requirements on non-collecting out-of-state sellers. After spending years stuck in court, its policy takes effect July 1 — the same date a similar policy starts in Puerto Rico. Vermont recently passed one and made it effective retroactively, on January 1, 2017. Other states are considering use tax notification and reporting measures.
Sending annual reports of consumer purchase activity to consumers and state tax authorities is more work for remote retailers. Colorado and the other states could use their policies as a back-door approach to getting out-of-state companies to register and collect. Even if companies choose not to take that route, use tax reporting should help states increase their use tax collections.
Taxing online marketplaces
North Carolina, Texas, Washington, and a number of other states are interested in taxing marketplace providers, and their efforts are likely to continue or resume as 2017 wanes. But not all agree it’s a good idea: New York lawmakers blocked Governor Andrew Cuomo’s attempt to tax them earlier this year.
Congress could tackle online sales tax
Federal lawmakers are preoccupied with tax reform and repealing or revamping the Affordable Care Act. Allowing states to tax remote sales transactions or preventing them from doing so, seems to be a low priority. However, a federal solution to the problem of untaxed remote sales should not be entirely ruled out.
Two bills have been introduced that would authorize states to tax certain interstate sales: the Marketplace Fairness Act of 2017 and the Remote Transactions Parity Act of 2017.
A bill that would codify the physical presence standard set by Quill and further limit states’ ability to tax interstate sales has also been introduced: the No Representation Without Representation Act of 2017.
Other sales tax changes
Many of the trends seen at the start of the year are continuing as 2017 progresses. Florida has enacted a tampon tax exemption, Seattle a soda tax. Tennessee is lowering the state sales tax rate on food and food ingredients, and there are calls to add a statewide sales tax in Alaska. Although he failed to achieve it this session, Governor Justice has been pushing to raise the state sales tax rate in West Virginia. The taxation of services — including online music and movie streaming services — remains a hotly contested topic. As always, many local sales tax rate changes take effect at the start of each new quarter.
Don’t be lulled into complacency. There’s a lot happening sales tax right now. Staying on top of these and other changes will allow you to prepare. Download Avalara’s 2017 Sales Tax Changes Mid-Year Update to learn more.