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Law360 (August 24, 2020, 4:26 PM EDT )
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| Liz Armbruester |
It was at the onset of the pandemic earlier this year that officials were faced with the tough decision of mandating closures and implementing stay-at-home orders, which significantly interrupted traditional consumer spending habits and impacted sales tax revenues.
Many states have been hit especially hard due to the decrease in sales tax revenue over an extended period of time. However, for 43 states, Washington, D.C., and some parts of Alaska, economic nexus laws[1] were in place and provided an ongoing stream of sales tax income from transactions occurring online within their jurisdictions. Still, despite ongoing revenue collections from economic nexus laws, many taxing authorities continue to face deepening budget shortfalls.
As governments work to balance their budgets to continue supporting COVID-19 relief programs and fund essential services, it's likely that many will make adjustments to economic nexus laws to increase revenue.
COVID-19's Impact on the Fabric of Economic Nexus Laws
Most economic nexus laws have set thresholds that determine if and when a remote business would trigger an obligation to collect sales tax in a state. These thresholds are often tied to a dollar amount in sales revenue within a state and generally range from $100,000 to $500,000. Kansas is an outlier, where making just a single sale into the state could trigger a sales tax collection obligation.
Since the economic impact of COVID-19 has begun to be felt across the country, some authorities have started to make tweaks to their economic nexus threshold limits.
For example, Tennessee recently decided to lower the economic nexus threshold[2] for out-of-state businesses and marketplace facilitators from $500,000 to $100,000, effective Oct. 1. With this move, Tennessee is among the first states to make any major changes to its economic nexus policies.
From the state's perspective, the move to lower the threshold makes monetary sense. By lowering the threshold, experts estimate that it will increase state and local sales tax collections by more than $17.7 million in fiscal year 2020-2021, and even more in following years. With a projected budget shortfall of $1 billion, the added increase in economic nexus revenue would help put a dent in the state's budget woes.
Lowering thresholds isn't the only change to economic nexus laws that we could see from taxing authorities in response to COVID-19. For example, South Carolina is applying sales tax to the gross proceeds of retail sales of tangible personal property in the state,[3] including "all value that comes from or is a direct result of the sale of tangible personal property."
This means that surcharges and fees applied to sales that are created by COVID-19, handling fees and takeout charges are included in sales tax. The added costs created by the need for certain services during COVID-19, like takeout and ready-to-eat meals, are helping to increase the sales tax revenue within the state.
Beyond changes to existing economic nexus regulations, some states are also beginning to look at broadening their sales tax base due to COVID-19 budget shortfalls. From data to delivery services, many taxing authorities are looking at alternative goods and services as potential revenue streams.
For example, earlier this year, Maryland was on track to tax certain digital products and gross revenues from digital advertising.[4] While the regulation wasn't signed into law, it's a prime example of the changes to taxability rules that businesses should prepare for as the pandemic wears on.
It's also important to note that online marketplaces are likely not exempt from the changes to sales tax laws in the wake of COVID-19.
In the South Carolina example, marketplace facilitators are responsible for collecting and paying sales tax on third-party sales in the state, which includes the entire charge tied to a marketplace's sales of restaurant food through popular food delivery marketplaces. While other states have yet to make any significant changes to their marketplace facilitator laws, it's too early to dismiss any changes as a possibility.
Managing Shifting Economic Nexus Requirements
As tax rules and regulations around nexus requirements continue to shift, businesses should look closely at how they are currently managing their tax compliance requirements.
Despite having nexus obligations in multiple states due to economic and physical nexus laws, many businesses manage their tax compliance using manual processes and spreadsheets. The reliance on manual compliance processes places an added burden on businesses and finance professionals to constantly monitor changing requirements and make updates to their systems accordingly.
When it comes to nexus requirements created by shifting economic nexus laws, the tax compliance team must be involved throughout the process to ensure that all potential trigger events are accounted for, including shifting threshold limits, transaction limits, etc. Tax and finance teams have to stay on top of all changing economic nexus laws while also managing other pressing deliverables during the pandemic.
For example, if a business sells into 10 states where it meets economic nexus thresholds, the business would need to calculate the right amount of sales tax based on the jurisdiction at the time of checkout, as well as aggregate all transactions for seamless returns into each department of revenue.
As businesses and employees continue to face uncertainty amid the pandemic, it's certain that tax policies tied to COVID-19 will continue to fluctuate. While economic nexus obligations may remain the same across many states, businesses will need to pay close attention to the changing nature of tax policy across state legislatures as the pandemic unfolds.
Liz Armbruester is a senior vice president at Avalara Inc.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] https://www.avalara.com/us/en/learn/guides/state-by-state-guide-economic-nexus-laws.html.
[2] https://www.avalara.com/us/en/blog/2020/07/tennessee-lowers-economic-nexus-threshold.html.
[3] https://www.avalara.com/us/en/blog/2020/08/covid-19-surcharges-subject-to-south-carolina-sales-tax.html.
[4] https://www.avalara.com/us/en/blog/2020/03/maryland-could-soon-tax-digital-products-and-digital-advertising.html.
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