Melissa Oaks, a state tax specialist at Thomson Reuters, recently presented a webinar titled "What’s New with United States Sales & Use Tax?", and the answer, it seems, is just about everything. As a result, companies are left to anticipate, interpret, and comply with endless changes to tax regulations across all 50 states.
Eighteen months ago, the U.S. Supreme Court, in South Dakota v. Wayfair, Inc., ruled that states can levy taxes on purchases made from sellers even if they have no physical presence in the state. The ruling unleashed a wave of legislation requiring companies to collect and remit sales taxes in states from coast to coast. This produced a new source of tax revenue that is politically palatable, because it results from enforcing an existing (albeit, expanded) tax rather than passing a new one.
“(States) can raise revenue without it technically being a tax increase,” Oaks explained.
You can listen to the new webinar on-demand, What’s New with United States Sales and Use Tax? here.
Many states passed tax legislation similar to the South Dakota law upheld by the Supreme Court, including a threshold requiring companies to begin collecting sales tax when their in-state sales surpass $100,000 or 200 transactions annually. Even with the Wayfair ruling as a roadmap, however, rules vary significantly from state to state.
“You can compare, for example, South Carolina and Illinois,” Oaks said. “Both states use this $100,000 threshold, but in South Carolina they include your taxable and exempt retail sales of tangible personal property, all of your wholesale sales of tangible person property, sales of products transferred electronically regardless of whether they’re subject to tax, and sales of services, again, regardless of whether they’re subject to tax. Illinois… only looks at your gross receipts for sales of tangible personal property, and excludes your sales for resale.”
Companies are required to understand the differences and remain in compliance. “A number of states have offered special grace periods or penalty waivers for the first few payment periods of implementation post-Wayfair, but as you enter 2020 and beyond, those are pretty much going to disappear,” Oaks said.
Oaks expects tax policies to have an increasing impact in 2020 on marketplace facilitators — companies including Amazon, Etsy, and eBay that must collect taxes on purchases on their platforms from third-party sellers. States are aggressively pursuing taxation of marketplace facilitators through legislation, policies and litigation, she added.
A key issue is the definition of a marketplace facilitator, which varies from state to state and is subject to legal challenge. “Each state has crafted its own criteria for what activities cause a platform to be considered a marketplace facilitator,” Oaks said, adding that it’s a challenging environment for marketplace facilitators “because it’s so new we don’t have a ton of guidance… or substantial authority opinion on some of these issues.”
In the absence of such guidance, Oaks advises that companies “make sure [they] have a consistent tax policy across the states, act in good faith, have solid documentation — that can go a long way.
“Right now, you have to control the levers you have power over and make sure that as these laws change — and they’re probably going to change more rapidly as states figure out what works and what doesn’t — that you have technology in place to adapt to whatever the situation is on a given day.”
Digital tax reporting
Another thing to have on your radar, Oaks noted, is that states are starting to pursue more aggressive remittance policies. “A number of European countries have started moving toward digital and real-time reporting and e-invoicing for value-added taxes (VAT), and states are getting really curious about this for sales taxes,” she explained.
One version of Connecticut’s budget bill in 2019, for example, would have required payment processors to remit sales taxes within 24 hours of a transaction. The bill had no threshold requirement, it applied to all sellers regardless of business size or sector, and it would have been effective with no phase-in period — despite a prevailing view that payment processors did not possess the information and technology needed to comply, Oaks said.
Massachusetts explored a similar policy in 2017 and concluded it would hit businesses with more than $1 billion in one-time costs and $28 million in recurring annual costs. Despite that, “other states have started indicating they would like to accelerate remittance and reporting as well, so it’s something that’s going to continue to gain steam,” Oaks said.
Oaks said there were several other specific areas of taxation that companies should be aware of:
“States are increasingly looking to expand the sales tax base to services,” Oaks said, noting that approaches under consideration vary across jurisdictions. Connecticut and Kentucky took steps in this direction in 2018 and 2019, and legislative action is expected in 2020 in California, Maryland, Nebraska, South Carolina, and Utah.
Current state tax laws are too inflexible to accommodate the rapid evolution of digital products, and that creates a potential revenue gap. “States are grappling with how to classify and tax digital products — anything from an e-book to software or even digital codes, games, apps, and electronically delivered services,” said Oaks.
“New things come out every day, and states can’t fit all of these things into a clear definition,” she added. “We’re going to see a lot of (regulatory) activity in the next year.”
Eleven states and the District of Columbia have legalized recreational marijuana — with more states likely headed that way — and an additional 36 states allow medicinal marijuana use. Cannabis tax rules vary significantly from state to state, deliver uncertain revenues, and will continue evolving. “Marijuana businesses need to think about their state sales tax and excise tax liabilities,” Oaks said. “A lot of states are hoping that the legal cannabis market can provide a much-needed source of state revenue” while avoiding political fallout, similar to the dynamic sales tax expansion following the Wayfair ruling.
Cannabis tax compliance is challenging, because there is a lack of clear boundaries between product sectors. “This complexity is only going to increase as we blur the lines between drugs, food products, pharmaceuticals, and agricultural products,” Oaks explained. In addition, marijuana is illegal in the eyes of the federal government, so marijuana businesses often cannot access banking services — and paying taxes with cash creates a new set of problems.