In a recent article, my colleague laid out some of the major sales tax changes that became effective in January 2023. Many were representative of trends that have manifested in the past several years. In this article, we will be looking ahead at some of the trends to keep an eye on this year and beyond to ensure your clients stay compliant.
While we are very early in state legislative sessions, we are already seeing some familiar trends pop up. These include rate reductions or exemptions on necessities, such as food and feminine hygiene products, and other expansions or reductions in the tax base.
As of last week, there were already nearly 300 bills introduced that would adjust the sales tax base in one way or another. Several states have introduced bills to reduce corporate and personal income tax. So far, these bills have not included mechanisms to pay for the reductions, but it’s not beyond the realm of possibility that future sales tax changes could be used to close the gap. Naturally, inflation remains on many peoples’ minds, and it is reasonable to expect that to be one of the drivers of tax legislation this year.
Maryland’s House Bill 1405, for example, would decrease the state sales tax rate if inflation exceeds 6%. Though not explicitly tied to inflation, another notable tax base expansion is included in Wyoming’s House Bill 72, which would expand the sales tax so as to broadly tax services. Another inflation-busting favorite is the sales tax holiday. Florida recently passed several year-long tax holidays that could be extended or turned into permanent exemptions. With state budgets flush, as many are, it would not be surprising to see other states use one-time tax holidays as a de facto tax refund.
Sales tax needs to evolve – here’s why
Another driver of legislation going forward will be the rise of new technologies. Some of which are poised to displace a significant amount of state sales tax revenue. Take, for example, the gas tax. As electric vehicles continue to rise in popularity, states will likely begin to think more about lost gas tax revenue and how to get some of that money back. For one thing, we don’t expect too many states to temporarily suspend their gas taxes like they did last year. States will also likely renew their focus on electric vehicles. For example, electric vehicle charging is currently non-taxable in 10 states. It would not be surprising to see some of those exemptions disappear. States also may consider taxes that are applied based on miles driven, regardless of the type of vehicle the driver uses. Similarly, with electronic cigarettes and vaping surging in popularity, we can expect to see more states enact additional taxes on vaping products as a means of replacing lost cigarette tax revenue.
Speaking of disruptive new technologies, the battle for a digital advertising tax (DAT) is far from over. Maryland has appealed a ruling striking down its DAT. While that appeal seems unlikely to succeed, it does seem likely that at least a couple of states will attempt to correct the infirmities of the Maryland DAT. New York is a rumored contender, and Massachusetts has already introduced a bill that would tax Massachusetts sourced digital advertising revenue in excess of $500,000 at the standard sales tax rate of 6.25%. Whether these efforts will ultimately be successful, only time will tell.
Anticipated sales tax changes and NFT taxation
Some sales tax simplification seems likely, but only at the margins. Despite the General Accountability Office (GAO) report and Senate Finance – Federal action feels unlikely. The Streamlined Sales Tax Governing Board (SST) is likely to turn its attention to some low hanging fruit, such as eliminating the immediate registration requirement, consistency in how states measure revenue, and removing transaction count thresholds. Even South Dakota has introduced legislation to remove its 200-transaction threshold. We won’t be surprised to see a number of other states do the same.
We are also anticipating more states will publish guidance on nonfungible tokens (NFTs). Based on Sovos’ last review, we know that most states seem inclined to tax NFTs like the underlying product they represent. But the question remains whether states will address the complexities of NFTs. So far, Washington is the only state that has published guidance attempting to do so. It seems likely that other states will follow the example of Minnesota, Pennsylvania, Puerto Rico, and Wisconsin in announcing their tax applies to NFTs while putting all the tough questions to one side.
Potential impacts of court rulings and legislative proposals
Additionally, we are watching to see if other states follow the ruling in Online Merchants Guild v. Pennsylvania. This case out of the Pennsylvania Commonwealth Court held that inventory in a third-party warehouse does not create nexus and that the state does not have unrestrained ability to require answers to nexus questionnaires. This ruling presented quite a shock for those who believed in-state inventory, even if stored by a third party, represented classic physical presence nexus. Whether more states will jump on the bandwagon, or whether more litigation will result in a more broadly applicable holding, again, only time will tell.
Finally, while nothing in this world is guaranteed, we think the federal “Fair Tax” proposal doesn’t stand much of a chance. For those of you not plugged into what the 117th Congress is up to, Georgia Representative Buddy Carter introduced a bill that would replace the income, payroll and estate/gift taxes with a national VAT imposed as an effective rate of 30%. Quite simply, a national VAT has been proposed in every new Congress since 1999, and while this proposal may receive a hearing and a floor vote, the smart money remains on the bill not passing. But we are ready for it if it does!
It's hard to predict what exactly lies ahead for sales tax in 2023. But you can learn more about the trends and potential expectations over the next year in this recent webinar.