Nontax events during the past year had an increasingly intense impact on taxes of all kinds, a result of the growing interconnectedness between individuals, businesses and governments worldwide.
In its sixth annual tax changes report, Avalara illustrated this interconnectivity: “A ship blocks a canal in Egypt and a shelf can’t be restocked in Ohio, a COVID outbreak in a factory in Vietnam clogs ports in Los Angeles, fires in California affect wine poured in Montreal, and a dearth of truck drivers empties gas pumps in the U.K. as a global labor shortage stresses the world’s hospitality industry.”
The report identifies a wide range of changes in sales taxes, global taxes and industry-specific taxes.
Sales tax changes are really based on changes to how we do business, observed Pam Knudsen, Avalara’s senior director of compliance services.
Online shopping was already growing prior to the pandemic, but shutdowns due to COVID greatly accelerated the process, she noted: “Digitalization is affecting sales tax. It’s a much more digital environment than it ever was — the pandemic has caused these shifts to occur in an expedited fashion. It exploded faster than what was expected, because people needed to get goods and services without having to go out.”
Conversely, offline sales — brick-and-mortar sales — grew by over 22% in the second quarter of 2021, according to Knudsen: “People flocked back to physical stores just because they could.”
“Jurisdictions are having to take a look at their tax regulations and are assessing how they can get the tax revenue that is needed in a real-time manner,” she added.
Although most COVID relief programs have ended, the pandemic is affecting sales and use tax in other ways, according to Knudsen. “Supply chain disruptions, caused in part by the pandemic, have led to companies moving or increasing the size of their distribution centers, generating new tax obligations when nexus thresholds are met in additional states,” she explained.
On the hunt
States are looking for more revenue sources to tax, Knudsen indicated: “These range from digital services to what constitutes nexus. Economic nexus laws are different in every state, and they have changed regarding the number of transactions and dollar amount thresholds. Most jurisdictions now focus just on a dollar amount threshold, which keeps getting lowered. Meanwhile, marketplace facilitator laws are evolving as jurisdictions want their money faster and with less processing. … There has been steady pressure to digitize sales tax collection and remittance processes.”
The report cites a recent survey that found that many unregistered small businesses with significant sales in other states nevertheless believe that they are compliant.
Meanwhile, shifts in nexus also affect income tax, with many states considering expansion of income tax nexus. California recently announced expansion of its income tax to internet-based sellers, via an interpretation of Public Law 86-272 (which provides taxpayers with immunity from state income taxes when their connections within a state are minimal or solely related to solicitation of sales of tangible personal property). This will add tens of thousands of out-of-state sellers to California’s income tax rolls.
“California’s recent decision to retroactively apply corporate income tax obligations to out-of-state e-commerce sellers is going to give ammunition to those who oppose the Wayfair Supreme Court ruling,” commented Scott Peterson, Avalara’s vice president of U.S. tax policy and government relations. “No one can argue that the state has an interest in interpreting P.L. 86-272, but doing so retroactively imposes an unexpected tax compliance burden on already burdened businesses — especially small businesses. It is likely that opponents of the Wayfair decision will use this as the latest example of complexity negatively impacting small businesses in their arguments against remote tax legislation. And because California is the first state to take this step, it’s likely that other states will feel empowered to follow a similar path. If others follow suit, the struggle between advocates and opponents of remote tax laws will continue to grow.”
And West Virginia, reacting to the increased availability of streaming subscriptions, recently declared digital streaming services to be a taxable service. The decision was made without enacting a new law or publishing a new regulation, but simply by declaring them to be taxable under existing law.
Worldwide issues
Supply chain questions are no longer a local matter, according to Knudsen. “Sales tax is now a global issue, with so many things from outside locations being sold into the U.S.,” she said.
“Differences in tax type matter,” she said. “European Union taxes are calculated differently than U.S. taxes. The cross-border tax landscape is becoming more complex, with regions across the globe looking at how their decisions impact them from a tax standpoint.”
There has been steady pressure both here and globally to digitize the collection and remittance process. A lot of countries are looking at real time. “Here in the U.S., many jurisdictions require sales tax reporting, but many are looking at the issue and deciding they want reporting in real time,” she said.
There are two reasons for this, Knudsen suggested. One, of course, is revenue. “The second is that it’s a way to minimize any fraud or corruption,” she said. “With real-time live data, they can track transactions accurately. Companies are changing their systems or partnering with a provider to enable them to comply.”
Specific sector trends
Lodging and hospitality have seen two countervailing trends. The hotel industry was projected to end 2021 with $59 billion less business travel revenue than in 2019, leading to a large loss of lodging tax revenue.
“But while standard hotels were hurt during the pandemic, short-term rentals were able to fly under the radar. They boomed and soared to new heights of demand,” Knudsen said. “In some rural communities there was an increase in demand, as people wanted to go to less populated areas where they were better able to control their environment. This area has seen continued demand even as restrictions are lifted.”
“Jurisdictions are realizing that the compliance part of short-term rentals needs to continue to grow. Some states began requiring online travel sites to remit taxes on behalf of hosts a number of years ago. Now, local jurisdictions are doing this as well. Cities are looking to marketplaces like Airbnb to help with this compliance and having them assist in making sure every listing on the marketplace has a permit and is reporting and remitting.”
The telecommunications industry has likewise experienced change due to the delivery of services through digital means. “Jurisdictions are asking themselves if they need to start taxing these services. Streaming movies, podcasts, music, books, training applications, and more are all going, for the most part, untaxed,” she explained. “How do we look at these digital services and adjust the regulations and requirements to tax them?”
Beverage/alcohol is another industry with a dramatic shift due to the pandemic. “You can now order a martini delivery, which was not possible before the pandemic,” Knudsen said. “When a drink is delivered to a different location, how does that change the tax model? The direct-to-consumer market has grown heavily — 16 states currently permit ‘cocktails to go.’ A lot of laws have changed to account for the fact that people want their drinks delivered to their house.”
