The complex and dynamic nature of sales tax means that every year we see ample change across regulations and enforcement. 2020—with all of its change and uncertainty—was no different. Early last year, the global Covid-19 pandemic prompted tax authorities around the world to reduce rates, issue payment delays, and filing extensions to provide relief to taxpayers. Now, states are faced with the challenge of balancing their budgets, while also continuing to support taxpayers during uncertain times.
As a result of the ongoing push and pull tax authorities are facing amid the pandemic, 2021 will bring with it new tax policies, expanded obligations for taxpayers, and the likelihood for more enforcement as the economic fallout from the pandemic begins to be seen. Despite the uncertainty that this year holds, one thing is certain—states that need tax revenue know where to get it. According to the Center on Budget and Policy Priorities, “state revenues have declined precipitously and costs are rising sharply, with many businesses closed or operating at reduced hours and millions of people recently unemployed.” While states will try to avoid adding to the economic burdens on taxpayers, they will work to get all of the revenue they can.
Here’s an outlook on what sales tax will look like in 2021.
The tax base will broaden
The pandemic has had differing effects on certain goods and services. For example, sales on products for life at home, like housewares, hobby supplies, and home fitness were up as much as 568% in April 2020 compared to the months before the pandemic. We also saw an increased reliance on digital goods and groceries last year as people spent more time in their homes.
To drive tax revenues without increasing rates on existing taxable goods and services, some states may look to broaden their tax base to include exempt goods and services. In fact, the Tax Foundation recommends that states broaden their sales tax bases rather than increasing taxes.
While broadening the tax base can be a tough sell, there have been moves by some states over the last year to do so. Wyoming attempted to place a tax on groceries on the table. On the digital front, states like Maryland, Nebraska, and New York, as well as Washington, D.C. all proposed taxes for digital advertising services. While these proposals haven’t made it into law yet, the widespread use of some exempt goods and services could become a solution for many cash-strapped states to drive new tax revenue streams.
Marketplaces and marketplace sellers come into focus
2021 could be the year that Florida, Kansas, and Missouri fall in line with most of the country and require marketplace facilitators to collect and remit tax on behalf of third-party sellers. Missouri lawmakers introduced legislation in November that would require out-of-state sellers to collect and remit Missouri sales tax and make marketplace facilitators responsible for collecting and remitting tax on third-party sales. It would also allow Missouri to participate in the Streamlined Sales and Use Tax Agreement as a nonmember, which would reduce the burden of compliance for remote sellers.
Even though marketplace facilitator legislation continues to expand, marketplace sellers aren’t completely off the hook. For example, over the past year, the California Department of Tax and Fee Administration (CDTFA) has been quietly sending notices to Fulfillment by Amazon (FBA) sellers, holding them liable for past sales tax. Washington state has also found marketplace sellers liable for past sales tax on inventory housed in the state, even though ownership of third-party inventory was transferred digitally by the marketplace, and the seller didn’t physically ship products into the state.
As 2021 picks up speed, more states could look to increase tax collections through these tactics, especially if those in California and Washington prove successful.
Noncompliant remote sellers will face enforcement
Sellers have been operating in an unofficial grace period for economic nexus laws since they became widespread in 2018. Unfortunately, those days are over as revenue departments face increased pressure to increase audits as soon as possible.
In fact, some states have already put out a warning to remote sellers about the impending wave of enforcement. In October 2020, Kansas Revenue Secretary Mark Burghart said the department intends to go after noncompliant remote sellers, starting with large sellers before moving on to small sellers. Others were already planning to beef up enforcement before the pandemic began with Kentucky and South Dakota both looking to hire more auditors in early 2020 to improve tax collections.
The increase in enforcement comes after e-commerce sales saw a rapid acceleration in 2020. Remote sellers that haven’t been managing their economic nexus obligations closely could face steep audit risk, especially if they expanded their online sales in recent months.
2021 is set to be an interesting year for sales tax in addition to the trends outlined above. Expect to see moves by localities to drive more tax revenue, increased scrutiny around consumer use tax, and new taxes on everything from vaping to marijuana. As the pandemic continues and life at home further accelerates the reliance on ecommerce, tax authorities will implement changes to continue gathering their slice of the pie through the enforcement and expansion of sales tax.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Liz Armbruester is Senior Vice President of global compliance operations.