7 tax changes businesses need to pay attention to

February 14, 2023 2:28 PM

Tax compliance for businesses presents a moving target in an ever-changing environment — and it's not getting any easier.

As a help to simplify the complex, the seventh annual Avalara Tax Changes Report covers key issues complicating tax compliance for businesses in sales tax and a host of other areas. This year's 100-plus-page report singles out emerging trends in numerous areas affected by COVID, geopolitical instability, and economic volatility.

Scott Peterson, Avalara's vice president of U.S. tax policy and government relations, highlighted specific areas for consideration, including marketplaces, delivery fees, services taxes, e-invoicing, state legislative action, and digital advertising.

1. Marketplaces (state actions)

State activity over treatment of marketplaces continues to be modified over time, observed Peterson. "Missouri was added to the list of states compelling marketplaces to collect sales tax," he said. "But Missouri's legislation is overly complicated — it could have been relatively simple given what they could have learned from other states more than four years after the decision in Wayfair."

The typical marketplace sells their own merchandise as well as other sellers' merchandise, Peterson explained: "Missouri requires separate reporting. Marketplaces must separate, on their returns, the sales of their own merchandise from the sales of other sellers' merchandise."

2. Marketplaces (federal actions)

Andrew Harrer/Bloomberg

New federal requirements were imposed on marketplaces related to counterfeit and stolen merchandise, he noted.

"There's been a lot of focus on stolen goods ending up on marketplaces for sale," he explained. "The sentiment is that marketplaces should regulate who is selling on their platforms. Congress passed legislation requiring marketplaces to keep records on who is selling on their platforms — name, address, and phone numbers of sellers, in addition to collecting sales tax on behalf of sellers. This puts marketplaces in a policing role to impede sales of stolen goods on their platforms."

3. Colorado delivery fee issue

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Beginning in 2022, Colorado imposed a retail delivery fee on retail sales of tangible personal property delivered by motor vehicle to a location in the state. The sale must include at least one item of tangible personal property subject to sales or use tax, and the retailer must collect the retail delivery fee from the purchaser and remit the fee to the Colorado Department of Revenue. "This new fee has not gotten any simpler since it was enacted," said Peterson.

"It's one fee added once to an invoice — it's not a line-by-line charge," he explained. "There must be a line for the delivery fee on the invoice itself, and that's tough for software systems to accommodate. Many retailers' billing/invoicing software allows for one line, which is used for sales tax. The law requires a separate line item for the delivery fee, and the software frequently can't accommodate this requirement. And accountants don't know how to help clients comply."

4. Kentucky services taxes

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Kentucky expanded sales tax to 33 new services. These include PR, lobbying, advertising, tattoo artists, massage therapists, and web hosting.

"For the most part, services must be in Kentucky before the law applies to them," Peterson explained. "But web hosting is often done remotely. Every web hosting company in the U.S. with Kentucky clients is impacted by this new taxability."

5. E-invoicing

Federal Reserve building in Washington, D.C.

Andrew Harrer/Bloomberg

Electronic invoicing is widespread and growing in importance outside the U.S., according to Peterson.

"The conversation is just starting inside the U.S., with the Federal Reserve hosting a pilot study of businesses that want to adopt e-invoicing," he said. "This study concludes in April. The e-invoicing framework will then be available for businesses operating inside the U.S. E-invoicing has spread through Europe and countries around the world. It brings uniformity to the invoicing process in a digital format, then brings that concept into the world of tax administration. For countries now mandating electronic invoicing, some require it at the time of the transaction. This is an obligation for businesses in the U.S. that do business around the world — they're now impacted by mandates in other countries."

6. State legislative action ahead

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State legislatures are now meeting during their 2023 sessions. "There are some interesting ideas out there, with immense budgets like Texas' $32 billion surplus," said Peterson. "Now, states need to figure out how to spend the money — they're looking at tax reductions, including sales tax reductions on things like groceries, or exempting feminine hygiene products. And many states are looking to get rid of personal income taxes. Of course, this could have a negative impact on the accounting industry."

7. Digital advertising taxes

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These are still in play, according to Peterson. "Maryland's digital ad tax false start is still in the courts, both state and federal, where the constitutionality of a tax on digital advertising is being challenged," he said.

"Maryland's dilemma slowed down interests in the concept for a time, but now at least three states are showing interest in taxing digital advertising," he continued. "The concept came out of the EU, with tax measures aimed at U.S. companies directing advertising at EU citizens. Maryland said their existing tax structure didn't capture this business activity, and so enacted their tax. Massachusetts, Connecticut and Indiana have just introduced digital advertising taxes. And on a separate front, New York has introduced legislation to tax data collection."