The Wayfair decision brought major disruption to the world of state and local taxes, but the addition of the COVID-19 pandemic has acted to completely change the whole model of taxation for states and taxpayers.
“There are more revenue sources that states are looking to tax,” said Pam Knudsen, senior director of compliance at tax compliance solution provider Avalara. “These run from digital services to what constitutes nexus in a given state. Wayfair changed the concept of nexus, and right after that states addressed marketplace nexus. Those laws are continuing to evolve and change and adapt.”
For examples, Knudsen referred to the Avalara midyear update, which detailed changes at the state level during the first half of 2021, including:
- California extended COVID-19 tax relief;
- Colorado and Maryland decided to tax digital products;
- Florida adopted economic nexus and a marketplace facilitator law;
- Kansas lawmakers overrode a veto to tax remote sales; and,
- Nevada and Pennsylvania offered tax amnesty.
The changing landscape has raised a number of issues, according to Knudsen: “How do we deal with new technology, and new ways of delivering goods, whether tangible or intangible like streaming services? Across the board, jurisdictions are looking at different types of commerce and attempting to figure out what to do.”
She cited the tremendous boom in short-term rentals in the lodging industry, for instance: “A lot of individual property owners are renting out their houses on a short-term basis. Jurisdictions hope to capture tax on these transactions. They’re working with both Airbnb and Vrbo platforms to find the most effective ways to get at this revenue.”
“The survey looks at the different ways states define economic nexus,” Knudsen noted. “Those laws continue to change regarding the number of transactions and dollar amount thresholds. Initially a two-fold threshold, now jurisdictions are focusing just on dollar amount, and that amount keeps being lowered. And marketplace laws are getting more complex. Some merchants use a marketplace platform plus their own website.”
“Marijuana legalization is another instance of complexity,” she said. “Numerous states have legalized marijuana, and every time that happens there are different tax consequences that come into play.”
Other issues include taxation of transactions at the source versus destination, according to Knudsen. “Historically jurisdictions would impose tax based on origin or destination,” she said. “Now, they are considering whether they really want to focus on one versus another. For example, Texas is proposing to establish destination taxation for internet orders based on where the product is being delivered.”
Last year, the Texas comptroller proposed distinguishing internet orders from telephone and in-person orders, and establishing destination sourcing for internet orders and sales made by a marketplace seller through a marketplace.
Many states are continuing the trend to destination sourcing. New Mexico made a recent switch from origin sourcing to destination sourcing. It explained its switch in a December 2020 notice: “Currently, most businesses use business location to determine the location in which they will report and use the corresponding tax rate, or in the case of internet-based sellers, the statewide Gross Receipts Tax rate. Starting July 1, 2021, tax on most transactions including remote sales will be based on the rate at the location where goods are delivered. The change, enacted under 2019 legislation, will allow cities and counties to share directly in tax revenue generated by internet and other remote sales.”
One of the things that the pandemic has brought into play has to do with the beverage alcohol industry, according to Knudsen. “Before the pandemic you might have wanted to order a margarita to go along with your Mexican food order, but you couldn’t,” she said. “Now, a number of states have enacted legislation to allow that.”
Nearly half of the U.S. consumers who bought alcohol online last year did so for the first time, mostly due to COVID, according to the survey. “Drinks to-go ordered from a marketplace may be taxed to the retailer or the marketplace, depending on the state,” she said.
“The pandemic has made a lot of things shift, and everyone is trying to catch up. States are still trying to figure out how to tax streaming services. The ‘Netflix tax’ is potentially a huge source of revenue, but many states are not sure how to handle it.”
