Mar 17, 2021
Silvia Aguirre, VP of Certificate Management at Avalara
It’s no secret that sales tax is complex with the various rates, rules, deadlines, and geographic differences that are constantly subject to change. As the pandemic continues and consumer preferences increasingly lean toward e-commerce, tax authorities will continue to implement changes to balance their budgets. Every year, Avalara explores emerging trends in its annual sales tax changes report. In 2021, we expect to see a range of changes including states broadening their tax base, new economic nexus and marketplace facilitator laws, and more state enforcement efforts.
Broadening the Tax Base
To avoid increasing rates on existing taxable goods and services, some states may look to broaden their sales tax base1 to include exempt goods and services to drive additional revenue. A broader tax base may make for a less regressive tax policy but can be a hard sell. Wyoming has proposed a tax on groceries2, but it was voted down upon introduction. Maryland, Nebraska, New York, and Washington, D.C., all proposed new taxes on digital advertising services3 in 2020, though only Maryland’s measures made it to the governor’s desk. He vetoed what he called “misguided bills,” but the Maryland House and Senate easily overrode the veto making Maryland the first to adopt a digital advertising tax in the nation. Because digital advertising is widespread, taxing these services could generate much-needed revenue.
Increased Economic Nexus and Marketplace Facilitator Legislation
Economic nexus laws have dramatically altered the tax compliance landscape since the first laws took effect July 1, 2018, following the South Dakota vs.Wayfair Supreme Court decision4. Of the 45 states with a general sales tax (including Washington, D.C., and many localities in Alaska), Florida and Missouri are the only two states that haven’t adopted an economic nexus law; however, economic nexus legislation is pending in both states. Two bills5 have been introduced in Florida, as well as in Missouri that would cause many out-of-state sellers to be liable for sales tax in each state, if enacted.
When it comes to marketplace facilitator laws, Florida, Missouri, and Kansas are currently the only states with a sales tax that doesn’t require marketplace facilitators to collect and remit sales tax on behalf of third-party sellers. If the economic nexus legislation under consideration in Florida and Missouri is passed, it would also make certain marketplace providers liable for the tax due on marketplace sales.
Missouri lawmakers introduced legislation6 in November that would require out-of-state sellers to collect and remit Missouri sales tax and make marketplace facilitators responsible for collecting and remitting tax on third-party sales. This legislation would also allow Missouri to participate in the Streamlined Sales and Use Tax Agreement as a nonmember, which would reduce the burden of compliance for remote sellers, making Missouri the first nonmember state to offer SST certified service provider (CSP) services.
Ramp up Enforcement Efforts
State tax authorities have given retailers time to adjust to the implementation of the new economic nexus and marketplace facilitator legislation, but we should expect this unofficial grace period to come to an end. Revenue departments will be under pressure to increase audits7 as soon as they can and will likely begin focusing their attention on remote sales tax compliance. Some states are using artificial intelligence and data mining tools to uncover non-compliant businesses, while others are simply shopping online to see whether tax is charged. The states that eased up on enforcement efforts due to COVID-19 will be looking to accelerate audits8 as soon as they can.
Alternatively, Kansas began economic nexus enforcement efforts on October 1, 2019, collecting nearly $5 million in remote sales and use tax since then. Kansas is unusual in that it provides no exception for small sellers, meaning one sale in the state can create nexus. In October 2020, Kansas Revenue Secretary Mark Burghart said the department intends to go after non-compliant remote sellers9, starting with large sellers before moving on to small sellers. Expect that many states will follow this “more aggressive auditing” as soon as the pandemic allows. Negative audit findings coupled with penalties and interest can lead to enormous financial burdens for businesses. Avalara’s sales tax risk assessment10 can help businesses identify their high-risk states.
The changes outlined here are only the beginning, there are a host of other changes that could impact businesses this year. From cracking down on consumer use tax to new tax potential for remote employees and expanding taxes for tobacco products, the pandemic has created the need for states to find alternative revenue streams amid all of the uncertainty. A full rundown of all the changes to tax in 2021 can be found in the 2021 sales tax changes report.