The Covid-19 pandemic may dramatically alter the sales tax landscape, including potential impacts regarding tax collection, economic nexus thresholds, and expanded taxation on digital goods and services.
New Tax Legislation
Given the magnitude of the economic crisis and states’ budget shortfalls, it seems likely that states will propose new tax legislation in light of Covid-19, whether it be raising the rates or broadening the base of existing taxes or creating entirely new taxes as revenue sources.
New Jersey has been particularly hard hit by the pandemic and not surprisingly, very active. In New Jersey, the legislature agreed to Governor Phil Murphy’s proposed rate increase on its tax on those with incomes above $1 million from 8.97% to 10.75%.
One of the more controversial new tax proposals also originates from New Jersey. In July, a bill was introduced in the New Jersey legislature that would impose a tax on persons or entities that process 10,000 or more financial transactions through electronic infrastructure located in New Jersey during the year. This new financial transaction tax is assessed at the rate of $0.0025 (a quarter of a cent) per financial transaction processed in New Jersey. The targets are stock exchanges such as the New York Stock Exchange (NYSE) and Nasdaq, Inc., which each house data centers there. In response, both exchanges will temporarily move operations to Chicago to demonstrate their ability to relocate in the event the tax is passed.
In early September, Pennsylvania Governor Tom Wolf renewed his call to lawmakers to pass legislation that would legalize and tax recreational marijuana, saying that it would give the state a desperately needed economic boost in the middle of the pandemic. Such legislation has remained dormant in the legislature for nearly a year.
In Vermont, the legislature recently did pass legislation (S.B. 54) that would legalize recreational cannabis sales and impose a 14% excise tax in addition to the state’s 6% sales tax and varying local sales taxes. The legislation contains an exclusion from sales and use tax for cannabis products sold by dispensaries if they are made through registered caregivers to qualified patients. The taxes would take effect by May 1, 2022.
In Washington state, a capital gains tax has been introduced in recent legislative sessions and could be reintroduced in the next legislative session. In the 2019 version, Governor Jay Inslee proposed a capital gains tax at the rate of 9% on capital gains earning from the sale of stocks, bonds, and other assets above $25,000 for individuals and $50,000 for joint filers. That tax was estimated to affect 42,000 taxpayers—about 1.5% of households—in the first year. Retirement accounts, homes, farms, and forestry were exempt. The proposal would have raised an estimated $975 million in Fiscal Year 2021. Despite having a Democratic majority in both the Senate and House, the bill ultimately died in the House. The pandemic could give the bill new life.
Economic Nexus Thresholds
Another possible way for states to increase revenue is to alter the economic nexus thresholds they enacted as a result of the U.S. Supreme Court’s South Dakota v.Wayfair, Inc. decision on June 21, 2018. In Wayfair, the Court upheld South Dakota’s economic nexus law, which imposed a sales and use tax collection and remittance obligation on a remote seller (i.e., a seller that does not have a physical presence in state) if the seller’s gross revenue from sales into South Dakota exceeds $100,000 or occurred in 200 or more separate transactions.
Since the decision, 43 of the 45 states that impose a sales tax have enacted economic nexus laws of their own. Florida and Missouri are the only remaining sales tax states that have not yet imposed a collection obligation on remote sellers. Kansas is the only state with a remote sales tax law that has not yet implemented a marketplace facilitator law.
As individuals were ordered to stay home and businesses forced to close, ecommerce and remote sales have exploded since the beginning of pandemic. This has resulted in significant increases in the collection of online sales tax revenues in those states with remote sellers law, and perhaps this will lead to Florida and Missouri finally enacting their own remote seller legislation.
Of the 43 states that have enacted the remote seller laws, many have enacted the same economic thresholds as South Dakota ($100,000 sales or at least 200 separate transactions), while others have enacted their own. For example, New York’s threshold is $500,000 in sales of tangible personal property and more than 100 transactions, while California and Texas each have a $500,000 sales threshold and no transaction threshold. Tennessee recently passed legislation that lowers its economic nexus threshold from $500,000 to $100,000, effective Oct. 1, 2020. More states could follow its lead.
What will be interesting to see is if states go below the $100,000 or 200 transaction threshold that was upheld in Wayfair. While it could be tempting for states to enact lower thresholds to increase the tax base, states should be mindful that any lower threshold could be subject to challenge under Wayfair as an undue burden on interstate commerce in violation of the dormant commerce clause.
Taxation of Digital Goods and Services
The pandemic will also likely trigger additional attempts to expand upon the taxation of digital goods and services. Taxation of digital services has been introduced in Maryland, Nebraska, West Virginia, New York, and most recently, the District of Columbia.
In Maryland, the General Assembly passed H.B. 732 in March 2020 that would create a new tax on digital advertising revenue, the first of its kind in the U.S. The tax would apply to any business that has at least $1 million of annual gross revenue from digital advertising services in Maryland and that has at least $100 million of worldwide annual gross revenue. “Digital advertising services” are “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.”
The tax rate would range from 2.5% of the annual gross revenues derived from digital advertising services in Maryland for persons with annual gross revenue of $100 million through $1 billion to 10% for companies with annual gross worldwide revenue above $15 billion. The bill would give the Maryland Comptroller the responsibility of establishing and interpreting the sourcing rules. Maryland Governor Larry Hogan vetoed the bill in May; however, the General Assembly could override the veto when it returns to session in early 2021.
In light of these potential changes, tax compliance hurdles will likely grow for companies doing business remotely. States may impose collection obligations on more taxpayers. As more businesses sell their products into new state and local jurisdictions, the businesses risk exceeding a jurisdiction’s economic nexus threshold and thus becoming subject to registration requirements and sales tax collection and remittance obligations. As states adjust existing tax rates or bases or enact entirely new taxes, businesses must continue to monitor their compliance obligations.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jay Jetter concentrates his practice in state and local tax and assists his clients with tax planning and business transactions. Jay’s experiences with both the Washington State and the Arizona Departments of Revenue have informed his practice, giving him helpful insight into tax regulations, and interpretive statements and tax controversy solutions.