Dillon Tax Consulting provides tax advisory and compliance services and solutions to companies across all industries, ranging in revenue size from several hundred thousand dollars to multi-billion dollars. We are your subject matter experts regarding the following State & Local Tax matters:
The Current State of Things
As I predicted in my March 25th post, Sales Tax Strategies During the Economic Disruption of the COVID-19 Outbreak, every state is revising its FY 2020 revenue forecasts in response to declining tax collections for March and April. [https://www.ncsl.org/research/fiscal-policy/coronavirus-covid-19-state-budget-updates-and-revenue-projections637208306.aspx] As reported by the National Conference for State Legislatures, some examples of these shortfalls include:
Maryland Seeks to Broadly Expand Sales Tax to More Services
On March 11, 20224, Delegate David Moon (D) introduced H.B. 1515 to the House Ways and Means Committee of the Maryland General Assembly, through which he proposed to broadly expand the sales tax base to cover many services, while reducing the sales tax rate from 6% to 5%. Delegate Moon proposed that expanding the sales and use tax to include services could result in a total revenue increase of approximately $1.4 billion in fiscal 2025 and $4.2 billion in fiscal 2029. This would significantly offset any rate reduction, resulting is significant increases to the State’s General Fund, according to Delegate Moon.
Online commerce provides the ideal environment for wholesale transactions and drop-shipments. You can literally have no employees or inventory – just a website and you are in business. BUT – if you are the wholesaler, every sale you make is considered a retail transaction by taxing authorities, and is subject to applicable sales tax, unless and until you can prove that it is exempt from sales tax (that is, present a valid resale exemption certificate). This means that the wholesaler is subject to sales tax nexus rules, and is responsible to either (1) collect and remit sales tax, OR (2) collect, verify and maintain applicable resale exemption certificates.
As 2023 comes to an end, lets recap a few important sales tax changes and offer insight into what taxpayers can expect for 2024:
· Economic Nexus Transaction Counts – Initially, more than half of the states adopting economic nexus thresholds included a transaction count element as part of the threshold, meaning that a remote seller would be deemed to have sales tax nexus with a state if sales exceeded either the revenue threshold or the transaction count threshold. Not only are the transaction counts arbitrary and more burdensome to track for remote sellers, but they have an outsized impact on small businesses and sellers with high volume / low price point sales per transaction. For example, a business with an average sale of $20 can exceed a state’s 200 transaction threshold with only $4,000 in sales. This point has been made and observed by The General Accounting Office’s November 2022 “Report to Congressional Requesters, Remote Sales Tax, Federal Legislation Could Resolve Some Uncertainties and Improve Overall System”. As of August 2023, Louisiana became the latest in a growing number of states that have dropped the transaction count from their sales tax economic nexus threshold. South Dakota dropped its transaction count effective July 2023, in addition to 8 other states that had previously adopted a transaction count as part of their nexus threshold (CA, CO, IA, ME, MA, ND, WA, WI). You can learn more about both measures in the linked Economic Nexus chart on our website. The Streamlined Sales Tax (SST) Governing Board, and its State and Local Advisory Council also seek to remove the transaction count component from SST states, as a best practice.
2022 is expected to bring heightened enforcement and increased sales tax audit activity for remote sellers. Charles Maniace, a vice president at the tax software firm Sovos, states that “States are now truly ready to [start] being fairly aggressive in their enforcement against existing online sellers.” [Forbes, Sales Taxes in 2022 – Issues to Watch for Online Retailers, by Liz Farmer (November 30, 2021)]
As 2021 comes to an end, lets recap a few important sales tax changes and offer insight into what taxpayers can expect for 2022:
State Economic Nexus Standards - UPDATED AS OF 8/1/23
In the wake of the U.S. Supreme Court's decision in South Dakota v. Wayfair, states may now require remote sellers with no physical presence in a state to collect sales tax on sales of taxable products and services delivered to customers in that state. This ruling does not simply affect online retailers, but all sellers of taxable goods and services who make sales into state in which they lack physical presence. Attached as an informational reference tool is a listing of the states that have adopted some form of economic nexus standard.
State Marketplace Facilitator Compliance Standards - UPDATED AS OF 8/1/23
Since Washington State first adopted a requirement that marketplace providers must collect and remit sales tax directly to the Department for all sales made on their marketplace, all states have chosen to impose sales tax compliance obligations on marketplace providers or facilitators. Attached as an informational reference tool is a listing of the states that have adopted some form of a marketplace facilitator nexud and compliance standard. Though the deifnition of a marketplace facilitator must be determined on a state by state basis (and is beyond the scope of this article), typically a marketplace facilitator is a business that provides a forum or platform on which third party sellers can advertise and sell their products, and on which the marketplace also provides billing and collection (directly or indirectly), or sets prices, or provides inventory storage and/or fulfillment services, among other things. The more recent trend among states, including California, is to adopt a broader definition of “marketplace facilitator”, including any business that lists a marketplace seller’s items for sale on their platforms.
State Notice & Reporting Requirements
A number of states have also adopted Notice & Reporting Requirements, which compel remote sellers, typically whose annual sales exceed a certain threshold - often as low as $10,000 - to elect to either (1) to collect and remit sales tax on sales to customers in the state, despite lacking a physical presence, or (2) to notify customers on their website and on each invoice of the customer’s use tax reporting obligation, and to provide annual information to each customer and to the Department of Revenue regarding all sales customers in the state. Failure to do so results in penalties that typically are larger than the remote sellers sales in that state. For your consideration, attached as an informational tool is a listing of the states that have adopted notice and reporting requirements.
WHAT YOU MUST KNOW
As such, it is incumbent on every remote seller to proactively engage someone - externally or internally - to closely monitor these and every state regarding implementation and enforcement of these provisions. Furthermore, every remote seller should implement processes to proactively monitor its sales activity - by revenue and transaction amount - both historically and prospectively, to ensure that they are meeting their obligations in each state and mitigating any historical exposure. Lastly, to the extent that a remote seller has or had physical presence nexus in a state (eg., by virtue of inventory in a third party fulfillment center), that seller should engage an expert to discuss the options to register and/or negotiate resolution of historical liabilities.
Maryland will begin imposing sales tax on the sale of digital products, starting March 14, 2021. This is an abrupt change in tax policy for a state that has historically steered away from imposing sales tax on electronically delivered and remotely accessible software, digital products, and cloud-based data and information services. These changes may be found primarily in Maryland Tax Code Sections 11-101(h) and 11-101(n).
The Comptroller’s office has published guidance on HB 932 21st Century Fairness Act which imposes sales and use tax on the sale of digital products. The guidance can be found here:
As we have previously reported, since the U.S. Supreme Court’s landmark decision in South Dakota v. Wayfair, 585 U.S. __ (June 21, 2018), forty-four (44) states (all except Florida and Missouri) have adopted economic nexus provisions for sales tax compliance purposes. Even the Alaskan local jurisdictions have gotten in on the action, adopting an intergovernmental agreement to establish a Commission that will provide governance over a streamlined, single-level administration of sales tax collection and remittance.