Nearly two years after the world’s first COVID-19 case, the pandemic remains a primary disrupter of the global economy. In early 2020, businesses were forced to evolve their strategies in the face of new regulations and mandatory restrictions. Today, supply chain challenges and labor shortages continue to change consumer behavior. Perhaps the greatest pandemic-related impact has been the shift to e-commerce as consumers turned their spending toward goods through the safety and convenience of online shopping.
The pandemic has also caused ongoing impacts for state and local governments. Early on, uncertainty around revenues and spending on relief measures took center stage. Now, many states are seeing double-digit growth in sales tax revenues. Much of this growth is attributed to the uptick in consumer spending we’ve seen, primarily due to e-commerce sales tax revenues being collected in 45 states via economic nexus and marketplace facilitator laws.
Given all of the changes among consumers, businesses, and governments alike in recent years, it’s important to understand what lies ahead. Here are a few of the top trends that will shape sales tax in 2022.
Economic Nexus Expansion
In 2021, we saw the final dominoes fall for economic nexus laws when Florida and Missouri approved new measures. Today, 45 states, parts of Alaska, and the District of Columbia have adopted economic nexus laws—all of which have varying threshold limits and rules.
It’s been over three years since the Supreme Court decision in South Dakota v. Wayfair, Inc., made it possible for states to enforce economic nexus. Since that time, e-commerce has drastically accelerated and consumer behavior has shifted in favor of online sales.
The confluence of these trends and widespread adoption of economic nexus laws will create a perfect storm of complexity and liability for businesses selling remotely in 2022. Because many businesses either expanded their online footprint or turned on their e-commerce presence in the past two years, the likelihood of businesses having already triggered new sales tax obligations is very high. Businesses will only continue to increase their obligations as they multiply online sales and adopt new channels in 2022.
It will be especially important for remote sellers to understand where they have nexus and begin to take the necessary steps to get registered in states, collect the right amount of tax, and be prepared to file more returns as an increase in enforcement of economic nexus is highly likely in the new year.
Given widespread budget surpluses across the country, many states are pulling back on other tax types, like corporate and income taxes. Whenever authorities pull back on certain streams of revenue, their reliance on others grows—leaving many states more reliant on sales tax in the upcoming year. Further reliance on sales tax combined with the growing opportunity for states to increase revenues from non-compliant remote sellers will tip the scale toward increased enforcement of economic nexus and create an urgent burden for many sellers.
The economic nexus burden will also grow as more local governments adopt their own laws. Local governments in home rule states have the power to levy and administer local sales tax. Chicago “received numerous inquiries on the topic of nexus” after Illinois adopted economic nexus in 2018. Since then, the city announced a safe harbor threshold of $100,000 in revenue from Chicago customers—meaning that businesses with no physical presence in Chicago are liable for certain city taxes if they meet or exceed that threshold. We could see localities in states like Alabama, Alaska, Arizona, Colorado, and Louisiana follow Chicago’s lead in 2022.
2021 was a marquee year for marketplace facilitator laws as well. Following adoption by Florida and Missouri alongside economic nexus, all states with a sales tax have now adopted marketplace facilitator laws.
The adoption of marketplace facilitator laws makes sense as more consumers turn to marketplaces for shopping. And, because these laws put the onus on the marketplace to collect sales tax for third-party sellers, states can tap an enormous market more easily.
While marketplace facilitator laws place requirements on marketplaces, the burden isn’t completely removed for marketplace sellers.
If you sell through a marketplace and make direct sales, you need to know whether a state, like California, requires you to include your marketplace sales when calculating your economic nexus threshold.
There may also be registration requirements for marketplace sellers. In states like Connecticut, remote marketplace sellers must register with the Department of Revenue Services, file annual returns, and deduct sales made through a registered marketplace if they meet transactions and sales thresholds, even if all sales are made through a marketplace that collects on their behalf.
With all of the ambiguity in laws surrounding who is responsible for tax on marketplace sales, many legal cases have been initiated. Earlier this year, the California Department of Tax and Fee Administration, or CDTFA, was sued by the Online Merchants Guild for holding Amazon sellers liable for back sales tax. While that motion failed in federal court, it’s just one example of likely litigation stemming from marketplace sales tax laws in 2022.
We’ve seen significant growth in omnichannel commerce alongside the acceleration of e-commerce and marketplaces. Businesses are now selling across a myriad of channels—from brick-and-mortar stores and physical kiosks to e-commerce stores and social media. Commerce is happening anywhere and everywhere. The growth of omnichannel is good for businesses and consumers alike as it creates more opportunities to reach consumers and makes it easier for consumers to make purchases. Still, with added opportunity comes added complexity.
Services like buy online, pick up in store—BOPIS—have become popular among shoppers due to their convenience. BOPIS allows customers to make purchases from anywhere and pick up their purchase at a physical store. This creates a sales tax challenge because e-commerce systems often calculate tax based on customers’ shipping or billing addresses. However, if a customer picks up their purchase at the store, tax would be based on the rate in effect at that store. The rates could be the same, but in some cases the rates could vary between the two locations.
2022 is shaping up to be a year that puts a renewed focus on sales tax, especially for remote sellers. As we ring in the New Year, there are numerous other trends that will likely have an impact on sales tax policy and enforcement moving forward.
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.
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