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Last year saw over 36,000 tax changes at the state level. With budget problems and recently passed federal tax reform, more changes may be coming in 2018. In this article, Avalara's Scott Peterson discusses two key legislative trends and the overriding theme for state tax authorities in 2018.
By Scott Peterson
Scott Peterson is Vice President of U.S. Tax Policy and Government Relations for Avalara, Inc. In his role, Scott leads Avalara's effort to be the first name in sales tax automation. Prior to joining Avalara, Scott was the first Executive Director of the Streamlined Sales Tax Governing Board.
The ongoing economic recovery notwithstanding, the overriding theme for state tax authorities in 2018 will be the need to generate revenue. For example, 31 states faced some type of revenue deficit in Fiscal 2017, and 22 states still collect less tax revenue than at their pre-recession-era peaks, after adjusting for inflation.
These struggles led to an extraordinarily active tax year in 2017: 36,254 tax changes were passed, including rate and product/service taxability, and 80 sales and use tax compliance bills were passed. In addition, 15 states introduced or proposed consumers' use tax requirements for out-of-state online sellers, and 12 states proposed economic nexus on out-of-state businesses that reach a threshold of maximum gross receipts. Finally, 26 states offered amnesty on back taxes, penalties, and interest for online marketplace sellers.
While 2018 may not be as active as 2017, two key trends will generate significant legislation. First, states will focus on collecting sales taxes that currently aren't being collected – with a continued emphasis on online marketplaces. Second, states will need to understand the impact of, and adjust to, the details of the recently passed federal tax legislation.
According to a GAO report, if states were given the authority to require sales tax collection from all out-of-state sellers, state and local governments could gain $8 billion to $13 billion annually. However, with the status of the controversial Marketplace Fairness Act in limbo, states are now going it alone. To force the issue, Alabama, Colorado and South Dakota have passed laws or changed regulations directly challenging the 1992 Quill v. North Dakota decision.
The Alabama regulation requires out-of-state retailers making $250,000 or more in sales to Alabama residents annually to collect and remit sales tax. The Colorado law requires retailers that do not collect taxes on sales to Colorado customers to notify those customers of their use tax obligations. The retailer must also send an annual customer purchase report to the state revenue agency, which could use the report to enforce compliance. The South Dakota law requires out-of-state businesses meeting certain criteria to collect and remit sales taxes on purchases made by South Dakota residents. Meanwhile, a New York “click-through” nexus law takes a different approach. It asserts that when out-of-state retailers enter into agreements with local online retailers to advertise the local retailer's merchandise on the out-of-state retailer's website, that is sufficient to establish nexus and impose sales tax on the out-of-state-vendor.
The hope here is that some form of challenge to the 1992 decision will make it to the Supreme Court, which could conceivably overturn the decision and simply allow for universal collection of sales taxes from out-of-state sellers.
The Supreme Court, however, is certainly not the only hope for the states, and other strategies to increase tax collection from marketplaces abound. Some states have asserted that warehousing goods and fulfilling orders from within a state is enough to create nexus and require the marketplace to collect taxes on sales to customers in that state. Minnesota and Washington passed laws directly requiring marketplaces to collect sales taxes on behalf of the sellers. Amazon recently announced it will begin collecting sales taxes on behalf of Washington, and this success will surely lead to other states passing similar laws.
The recent federal tax legislation will likely have a significant impact on state tax collections. For example, the new $10,000 cap on state and local tax deductions will increase the federal tax burden on some taxpayers, creating very difficult choices for states seeking to increase state and local taxes. It could even force some local governments to reduce taxes and make big cuts to schools and social services. States are scrambling to respond to this dilemma. For example, California is considering an idea to replace income taxes with employer-side payroll taxes, which are still deductible. This could potentially completely offset the new limit on deducting state taxes without costing employers anything. So far, no state has proposed such legislation, but this and other strategies will certainly be considered.
To make things even more complicated, while states are determining the financial impact on their taxes from changes to federal tax laws, a significant number have budgets that are in bad shape. Bad budgets will force states to look for additional sources of revenue, including increasing rates or broadening the base. For example, Connecticut Gov. Malloy is asking the legislature to fill a $208 million budget shortfall by increasing the sales tax rate from 6.35 to 6.5 percent, increasing the sales tax on hotels from 15 to 17 percent, increasing the sales tax on restaurant food from 6.5 percent to 7 percent, and repealing an exemption on nonprescription drugs. Tennessee has increased its gas tax, which, in addition to increases in 2017, includes a $0.01-per-gallon increase in July 2018 and July 2019 for gasoline, and a $0.03-per-gallon increase in July 2018 and July 2019 for diesel. Oregon has added $0.04 per gallon to its motor fuel tax, raising it to $0.34 a gallon. The state has also added a $15 tax on the sale of bicycles retailing for $200 or more with wheels of at least 26 inches in diameter.
Whatever states do to generate new revenue, the results will not be uniform. They will certainly focus on different taxes and impose different rates. When it comes to implementing a marketplace collection regulation, for example, the first five states to do so all have different effectiveness dates, and this trend will likely continue.
This lack of uniformity means that to protect themselves, retailers need to find reliable resources for tracking the evolution of these regulations, assessing the impact they will have on their businesses, and automating sales tax calculations in a way that complies with the latest changes. Only by doing so can retailers focus their attention on satisfying the needs of their customers instead of the needs of tax agencies.
Copyright © 2018 Tax Management Inc. All Rights Reserved.
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