The COVID-19 pandemic has affected how we learn, shop, socialize, travel, and work. That, in turn, is influencing tax policy.
After employees across numerous industries transitioned to working from home, states struggled to determine the tax implications of a newly remote workforce. As ecommerce sellers struggled to keep up with a surge in sales, states that tax remote sales benefited from a steady source of sales tax revenue. When education and events moved online, the question of how tax should apply to virtual events arose. And so on.
Our 2021 sales tax changes report examines emerging trends in business and tax. As always, it should serve as a resource for business leaders and tax professionals seeking to better understand the ever-shifting tax landscape.
Highlights from the 2021 sales tax changes report
Ecommerce is more essential than ever.
With social distancing measures in effect throughout much of the country and world, ecommerce has become the preferred way to do business. Companies with an established online sales channel were well-positioned to meet the sudden surge in demand. Many brick-and-mortar businesses lacking an ecommerce channel suffered and scrambled to create one.
Growing BOPIS sales underscore the need for robust POS systems.
Selling online enables brick-and-mortar stores to offer buy online, pickup in store (BOPIS) services, which have grown dramatically since the onset of the pandemic. While a great way to merge bricks with clicks, BOPIS can complicate inventory tracking, logistics, and sales tax compliance. Having a point-of-sale (POS) system that can handle that complexity is therefore key.
Online sales tax revenue has been a boon.
During the third quarter of 2020, nearly $1 out of every $5 spent came from online orders. States able to tax remote sales benefited: Sales tax collections from online retailers and marketplaces have been a steady and even growing source of revenue in much of the country throughout the pandemic.
Florida and Missouri are likely to adopt economic nexus in 2021.
Only two states with a general sales tax don’t tax online sales by out-of-state sellers via economic nexus. Florida has been hit hard by the drop in in-person sales and tourism as well as its inability to tax remote sales. Missouri has fared better but would still gain from requiring out-of-state sellers to collect and remit sales tax. Lawmakers in both states have already introduced economic nexus legislation ahead of the 2021 legislative sessions.
Collection requirements for marketplace facilitators are expected to grow in 2021.
2021 could also be the year Florida, Missouri, and Kansas make facilitators, not individual marketplace sellers, responsible for collecting and remitting sales tax on third-party sales. Marketplace facilitator laws are already in effect in most states.
Marketplace sellers could come under scrutiny for past sales tax.
It’s common practice for marketplace sellers to store inventory in warehouses and fulfillment centers owned or operated by marketplaces. California and Washington are two states that have found marketplace sellers liable for past sales tax because of such inventory. They insist the inventory gave out-of-state marketplace sellers a physical presence in the state, and therefore an obligation to register then collect and remit sales tax, before the marketplace facilitator laws took effect. Other states could pursue a similar path in 2021.
States could crack down on unregistered sellers.
Most states have been slow to enforce economic nexus, understanding what a huge compliance challenge it represents for some sellers. But now that more than 2 ½ years have passed the since Supreme Court of the United States effectively granted states the right to tax remote sales in South Dakota v. Wayfair, Inc. (June 21, 2018), the patience of states is waning. Remote sales tax collections have been surprisingly resilient during the pandemic, so states in need of more tax revenue may turn a scrutinizing eye on unregistered out-of-state sellers making sales in the state.
Supply chains and tax compliance will be challenged by Brexit.
Once the U.K. officially breaks from the EU Customs Union and VAT regime on January 1, 2021, many U.S. sellers and marketplaces will have to be U.K. VAT registered or their goods will be blocked at the U.K. customs border. This is a Wayfair moment for Britain, and it will have an enormous impact on many businesses.
Virtual events could trigger new tax policies.
The growth of ecommerce caused states to push for the right to tax remote sales. The growth of virtual events could have similar consequences. The longer businesses host online conferences and virtual events rather than in-person events, the more states could look to tax these transactions.
Manufacturers expand into new channels.
With face-to-face customer contact on the wane because of COVID-19, manufacturers are rethinking channel strategies. To better compete, some are bypassing normal wholesale and distribution channels so they can sell directly to consumers or other businesses. And this, of course, has tax implications.
Software companies can trigger sales tax nexus in many ways.
State sales tax rules surrounding software are often incredibly nuanced, and since software businesses tend to have customers nationwide, they can be subject to tax laws in numerous states. It’s common for software companies to engage in up to nine nexus-triggering events, from adding subscription-based models to online selling. The 2021 sales tax changes report covers these issues and more. Get the report.