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Law360 (February 23, 2021, 2:34 PM EST )
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| Liz Armbruester |
The changes from the past year have had a range of effects on us all. On the positive front, millions of people transitioned to productively working from home. We also saw an explosion in e-commerce, making it easier for consumers to make purchases in a safe manner and expanding sales channels for businesses of all sizes.
While it's clear that we have all experienced change, what isn't yet clear are the lasting changes to tax compliance. While it may be too soon to tell what the extent of the change will be for sales and use tax, it's hard to ignore how the pandemic-driven shift toward e-commerce is already affecting the way state and local authorities think about sales tax — specifically remote sales tax laws.
Current Remote Sales Tax Landscape
More than 43 states, the District of Columbia, and some local governments in Alaska now tax remote sales via economic nexus laws, and a similar number of jurisdictions require marketplaces to collect remote sales tax on behalf of their vendors. And, for many states, these laws have proved to be essential amid the pandemic.
While the rapid adoption of e-commerce has helped drive retail sales for businesses, it has also created a surge in online sales tax collections in some states. In Texas, the unexpected surge in online sales has helped one locality increase its sales tax collections by nearly 15%.[1] This positive outcome is being seen across the country as remote sales tax collections benefit from our online-first society.
The majority of states have remote sales tax laws and have realized the benefits of the e-commerce trend. However, we are still in the midst of a major evolution[2] in how states adopt, apply and enforce these laws.
Continuing Evolution of Remote Sales Tax
Moving forward, there are three main changes we can expect to see in the evolution of remote sales tax laws — further adoption, increased enforcement and changing rules.
Due to the economic pressures of the pandemic and growth in e-commerce, we may see the last two states without economic nexus laws implement their versions this year.
Last year, Florida saw sales and use tax collections drop year-over-year,[3] primarily because in-person sales and tourism dropped due to the pandemic. Plans to adopt economic nexus are moving through the Florida Legislature[4] as economists project it could bring more than $1 billion a year in revenue to the Sunshine State.
The other holdout is Missouri. While sales and use tax collections are stronger in Missouri,[5] the Show-Me State will try to get an economic nexus bill on the governor's desk as soon as possible. H.B. 554, which could be the bill that gets signed, passed through its first hearing on Feb. 10 and cleared its second house committee on Feb. 22.[6]
In addition to adoption and expanded online sales tax obligations for remote sellers in two new states, businesses will soon face increased enforcement of existing remote seller laws.
Since the widespread adoption of these laws began in 2018, most authorities have extended businesses an unofficial grace period for enforcement to give time for compliance. Although the COVID-19 pandemic helped extend the grace period, the postponement won't last forever.
In fact, in October 2020, Kansas Revenue Secretary Mark Burghart said the department intends to go after noncompliant remote sellers,[7] starting with large sellers before moving on to small sellers. He did not indicate when the enforcement would specifically begin.
Marketplace sellers should also brace for increased enforcement moving forward. For more than a year, the California Department of Tax and Fee Administration has been quietly sending notices to Fulfillment by Amazon sellers,[8] holding them liable for past sales tax. The department claims these marketplace sellers had a physical presence in the state because they had inventory stored for sale in a marketplace facilitator's warehouse or fulfillment center.
Similarly, in November 2020 as a result of Washington Department of Revenue Determination 18-0255, Washington state[9] has also found marketplace sellers liable for past sales tax based on their inventory in the state, even though ownership of the inventory was transferred digitally by the facilitator and the seller didn't actually ship products into the state.
In February, Pennsylvania began offering a 90-day voluntary compliance program[10] to businesses that stored property in Pennsylvania going back to Jan. 1, 2019, but never registered to collect and remit taxes.
The last major evolution that we are already starting to see across the country comes in the form of changes to existing remote sales tax laws. When it comes to economic nexus, the criteria that create an obligation for remote sellers to collect sales tax vary by state.
Generally, economic nexus laws include a sales tax obligation based on a certain level of economic activity within the state, including sales revenue, transaction volume or a combination of both.
As online sales have increased and other collections stalled due to the pandemic, some states have started to make changes to the amount of revenue or number of transactions that constitute an obligation to collect remote sales tax.
On Oct. 1, 2020, Tennessee lowered its economic nexus threshold from $500,000 to $100,000,[11] meaning that if a business's annual sales into the state exceed $100,000, it now has an obligation to collect in the state.
The past year has driven significant change in consumer behavior. While we're likely to see some shift back to traditional, in-person shopping once the pandemic is in the rearview mirror, it's more likely that the newfound consumption behaviors we've adopted will remain in the long run.
As our society's reliance on e-commerce continues to grow, tax authorities will keep pace by expanding the nature of remote sales tax laws.
As businesses continue to manage the effects of the past year, they will also be faced with a changing tide in the world of remote sales tax. From adoption to enforcement to changing rules, remote sales tax will prove to be a moving target for the foreseeable future.
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.newschannel10.com/2021/01/22/canyon-sales-tax-rises-since-last-march/.
[2] https://www.avalara.com/us/en/research/sales-tax-changes.html.
[3] https://floridarevenue.com/taxes/PDF/MCR0620.pdf.
[4] https://www.fox13news.com/news/senate-panel-backs-plan-to-charge-online-sales-tax-in-florida.
[5] https://themissouritimes.com/missouri-general-revenue-continues-to-climb-september-report-says/.
[6] https://www.thecentersquare.com/missouri/missouri-online-sales-tax-bill-would-lower-levy-rates-in-tandem-with-revenue-increase/article_6698ee1c-6bf2-11eb-9b55-2b3cbc104a93.html.
[7] https://www.avalara.com/us/en/blog/2020/10/kansas-to-seek-sales-tax-revenue-from-unregistered-remote-sellers.html.
[8] https://www.sacbee.com/news/politics-government/capitol-alert/article237036689.html.
[9] https://dor.wa.gov/washington-tax-decisions.
[10] https://www.revenue.pa.gov/GeneralTaxInformation/Tax%20Types%20and%20Information/TaxObligOnlineRetailers/Pages/Voluntary-Compliance-Program-For-Retailers.aspx.
[11] https://legiscan.com/TN/bill/SB2932/2019.
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