Sales Tax Update – March 2024

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.

...to the extent this legislation sees any further light, the General Assembly must really consider a small business exemption relating to select services most commonly consumed by commercial enterprises, such as legal, accounting and IT support services.

Services proposed to be taxed include:

• Business Services: data/IT; accounting/payroll; office support; employment; consulting services; public relations/marketing services; building/property maintenance (including landscaping); and repair services (including heavy trucks and office/commercial equipment).
• Professional Services: legal services; financial/tax services; architectural/engineering services; and interior design services.
• Information Services: broadcasting; publishing advertising; Internet subscriptions.
• Travel Services include the following types of services: commissions/fees for reservation and travel services; trip planning, including pre-packaged and custom tours; visitor information and sightseeing tours; automobile club services; other travel services including travel insurance, checks, etc.
• Leisure and Recreation Services: hobby instruction; boat services; golf course and country club services; admissions to live events and fitness/recreational venues; personal training services; spa services; and certain child day care services.
• Building Maintenance Services: residential interior cleaning services; swimming pool cleaning and maintenance services; residential pest extermination and control services; residential landscaping services.
• Remediation and Waste Services: hazardous and nonhazardous waste and recyclable collection, transportation, storage and disposal services; and site and building remediation and environmental emergency response services.
• Maintenance and Repair Services: all tired vehicles; hardware and consumer electronics; appliances and household furniture; clothing, footwear, watches, jewelry, and sports equipment; and value of service contracts (autos, appliances, etc.).
• Personal Care Services include the following types of services: hair/skin/nail care services (including tanning and tattoo/piercing); massage services; and weight loss services.
• Personal Services: veterinary services; funeral and cremation services; laundry and dry cleaning services; parking services; vehicle washing services; photographic services; academic tutoring and exam preparation services.

Many small businesses rely on such services as legal and accounting that larger companies can afford to internalize.  Delegate Moon notes that such an expansion to so many services would have a detrimental impact on small business owners, forcing some of them to purchase such services from vendors in other states.  What the legislator does not understand is that Maryland sales tax would still be imposed on vendors with economic nexus to Maryland, and in the absence of sales tax, the consumer would still be obligated to self-report use tax on taxable services consumed or enjoyed in Maryland.  As such, to the extent this legislation sees any further light, the General Assembly must really consider a small business exemption relating to select services most commonly consumed by commercial enterprises, such as legal, accounting and IT support services.

Sales Tax Economic Nexus Updates

Two more states have amended their sales tax economic nexus threshold, doing away with the transaction count.  By dropping the transaction count from their economic nexus threshold, Indiana and Wyoming have followed the path carved by ten (10) other states that have removed a previously adopted transaction count as part of their nexus threshold (CA, CO, IA, LA, ME, MA, ND, SD, WA, WI). 

Indiana:  Specifically, pursuant to S.B. 224, effective retroactively on January 1, 2024, Indiana’s economic nexus statute is amended to eliminate the 200 or more separate transactions prong of the threshold that requires retail merchants to collect and remit sales or use tax. As a result, retail merchants that make 200 or more in annual sales transactions into Indiana that total $100,000 or less in a calendar year are no longer required to collect sales or use tax.  Interestingly, in this same legislation, Indiana extended its statute of limitations for sales taxes (among others) to a uniform due date of January 31 of the year after the calendar year for which the return is filed for all periodic taxes. A "periodic tax" is defined as a tax for which a return is required to be filed and the tax is required to be remitted four times or more in a calendar year.  As such, the statute of limitations no longer tolls on a periodic basis (e.g., monthly or quarterly) rather on an annual basis.

Wyoming: Pursuant to H.B. 197, effective July 1, 2024, Wyoming’s economic nexus statute is amended to eliminate the 200 or more separate transactions prong of the threshold that requires retail merchants to collect and remit sales or use tax. As a result, retailers that make 200 or more in annual sales transactions into Wyoming that total $100,000 or less in a calendar year are no longer required to collect sales or use tax.

This is a positive and promising trend.  As previously reported in our December 2023 sales tax update, 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 states continue to seek novel measures to fund specific needs, companies must seek sales tax experts to advise and guide them and they must implement sales tax software solutions to automate their current and growing compliance obligations.

Learning From Other Taxpayers

I was recently engaged to review the automated sales tax codes to which a new client’s products and services were mapped in the company’s sales tax compliance platform.  As a result of the review, we identified numerous products and services that were mapped to the incorrect code, resulting in inaccurate tax treatment for the company’s sales invoices.  For example, if I sell a Software As a Service product, and I map my SaaS sales to a SaaS tax code, however the product is actually a cloud-based information service for which I charge a subscription, a SaaS tax code is going to exempt certain sales that should be taxed in certain states and tax certain sales that should be exempt in other states.  This will result in exposure in some states and overcollection in others.  I need to select the correct tax code based on the multistate tax treatment of cloud-based information service subscriptions, or create one specific to the company if no one code accurately taxes my service.

...conduct state-specific research relative to the company’s products and services, and then endeavor to map each product and service to the most relevant tax code based on the desired tax treatment, rather than simply based on the description of the item in the list of potential tax codes.

If your business is selling into multiple states, it is imperative that your company utilizes the efficiency and effectiveness of a sales tax automation platform.  Sales tax automation platforms, such as Avalara’s AvaTax, have thousands of potential tax codes, each one of which represents the tax treatment for a defined product or service in each state.  The issue is that these tax codes are designed to be “one size fits all” and do not necessarily reflect the facts and nuances of your specific business, how it operates, how it contracts with customers and how it invoices customers. 

Furthermore, it is quite easy to select the incorrect, and therefore inaccurate, tax code based on the code’s description.  When sales tax professionals are engaged to map a company’s products and services to relevant tax codes, we conduct state-specific research relative to the company’s products and services, and then endeavor to map each product and service to the most relevant tax code based on the desired tax treatment, rather than simply based on the description of the item in the list of potential tax codes. To the extent tax overrides in certain states are needed, or altogether custom codes, these are created as well, to most accurately reflect the company’s desired tax treatment in all states in which it must collect sales tax.  This little extra insight and effort on the front end significantly reduces audit risk in the future.

Moral of the story: while sales tax automation platforms are a necessary and essential tool for multistate sales tax compliance, it is critical to involve sales tax professionals in the implementation process, particularly with regard to mapping the products and services to the appropriate sales tax codes.