Editor’s note: The following article was submitted by Avalara, an MACPA Preferred Provider.
The year 2018 brought us a transformative U.S. Supreme Court decision. Then 2020 brought the global spread of the COVID-19 pandemic.
What will 2022 bring?
Fallout from those two events will likely continue to shape operating conditions as well as tax compliance issues for U.S. businesses.
Continuing COVID complications
First, let’s look at ongoing impacts of the pandemic. Some 24% of U.S. consumer spending in the first half of 2021 was transacted online as consumers continued to avoid in-person purchases. Business researchers estimate the pandemic accelerated the growth of e-commerce by almost five years.
Companies have also faced global supply chain disruptions, which the omicron variant may make worse. China has imposed quarantine requirements on ships arriving in its ports, delaying turnaround times. Driver and dockworker shortages have kept ships parked offshore in U.S. ports, while the “Great Resignation” meant products that have been delivered to stores don’t always get stocked on shelves. Companies in countries grappling with coronavirus surges have shut down factories and distribution networks, while consumers in countries less affected by the virus at that moment continue to place large new orders, prompting U.S. retailers and manufacturers to seek alternative suppliers for the products and parts they need.
Businesses shifted in response to all of this. A survey by Oregon-based Umpqua Bank found that 96% of midsize businesses and 65% of small businesses have changed in some way in response to COVID-19. This can mean everything from a new company vision to new products, staffing modifications, and supply chain adjustments.
All of this has implications for a company’s sales and use tax compliance:
- New products? Are these new SKUs exempt or taxable, and if taxable, at what rate?
- New suppliers? Are all resale or exemption certificates valid and up to date?
- More refunds for online sales? Do sales and use tax returns need to be amended?
- New business through drop shipping? Who’s liable for any tax due?
When much of the United States shut down in March 2020, federal, state, and local governments stepped forward with a range of programs to support affected businesses. Those relief measures have run their course and are going away.
One common step state and local governments took was to give businesses more time to file and/or pay their tax bills. For the most part, those filing and payment extensions have expired, and businesses are liable for all tax revenue collected.
Some state (and local) governments also lightened their pandemic tax burdens by not enforcing certain nexus rules. (If you need a refresher on nexus, check out our state-by-state guide.) For example, when companies imposed work-from-home mandates early in the pandemic, many of them found themselves with a new physical nexus in the states where their employees lived. Many states chose not to enforce normal nexus rules in this situation.
But often this was only a temporary policy. For example, as of July 1, 2021, out-of-state companies with employees working from home in Pennsylvania may have Pennsylvania tax obligations. Likewise, Indiana let its more-lenient policy on nexus expire on June 30, 2021, and Massachusetts resumed enforcement of its pre-pandemic nexus rules on Sept. 16, 2021.
Companies that sell through marketplace facilitators — like Alibaba, Amazon, eBay, or Walmart — will also be impacted by laws in all states with sales tax that require the marketplace facilitator to collect and remit sales tax on all sales made though their platforms.
And an increasing number of governments — in the United States and globally — are requiring electronic invoicing, digital filing, or reporting. This gives them greater insight into sales data, which can be used to target enforcement activity.
Echoes of Wayfair
Some states began enforcing new economic nexus rules within days of the Supreme Court’s 2018 ruling in South Dakota v. Wayfair, Inc. (Click here for a discussion of that ruling and its significance.) The last of the states and districts with sales tax laws caught up by adopting economic nexus rules during 2021:
- Puerto Rico began enforcing economic nexus on Jan. 1.
- Florida enacted economic nexus on April 20 and began requiring certain out-of-state vendors to register starting July 1.
- Kansas lawmakers enacted an economic nexus law with a small seller exception, which took effect July 1. (It replaced a previous Kansas Department of Revenue rule that any sale into the state would establish nexus for a remote vendor.)
- Finally, Missouri on June 30 enacted a law requiring out-of-state sellers to collect and remit sales tax if they have at least $100,000 in cumulative gross receipts from the sale of tangible personal property. It takes effect — across the state’s stunningly complex web of more than 2,000 overlapping local taxing jurisdictions — on Jan. 1, 2023.
In addition, Alabama, Alaska, Colorado, and Louisiana allow localities to have total home rule, which means they can establish their own sales and use tax rates and certain taxability rules. In Louisiana, for example, remote retailers with economic nexus must register and file with the state and also with every one of the state’s 64 parishes where they make sales. (Adding to the complexity, municipalities and districts can set their own tax rates, so rates within a parish often vary.)
And Chicago, which has home rule status within Illinois, has established its own economic nexus standard. Effective July 1, 2021, businesses with no physical presence in Chicago are liable for certain city taxes if they meet or exceed $100,000 in revenue from city customers.
More is better
More information about changes to U.S. tax regulations can be found at the Avalara Tax Desk, which is a leading source of information on transaction taxes. The full Avalara Tax Changes 2022 report is available at avalara.com.