What Does the 2020 Legislative Landscape Look Like for Sales Tax?
For sales tax, 2020 is expected to be a little quieter legislatively but that doesn’t mean there aren’t important measures to watch out for that will affect the daily work of sales tax pros.
The past two years have been extraordinary in terms of the volume of sales tax legislation enacted across the states. We turned to some sales tax policy experts to gage what the top issues will be in the 2020 legislative session and trends we can expect in sales tax for 2020.
Tailwinds of Economic Nexus Adoption and Clean Up Efforts
The evolution of post-Wayfair economic nexus has mostly settled but there will be some tweaks and clean up measures to existing provisions this year. All but two states, Florida and Missouri, have enacted legislation for remote seller tax collection.
However, our eyes are still on Kansas to enact legislation that includes a smaller seller threshold rather than its current policy with a zero dollar/transaction threshold. Our experts expect these straggler states to enact economic nexus legislation in 2020.
Missouri tax policy expert, Ray McCarty, states the biggest impediment to passing an economic nexus bill in Missouri last year was disagreement over how to spend the extra tax revenue – an issue that continues into the 2020 legislative session. McCarty says one benefit of being an economic nexus laggard is Missouri will only adopt a monetary threshold after seeing many other states walk back their number of transactions thresholds.This is great news! States that haven’t already eliminated the transaction threshold very well may do so in 2020.
Other clean up measures for economic nexus rules are expected to clarify and simplify seller obligations, both on the state and local level. “States with “home rule” locally administered sales taxes will continue efforts to simply administration,” said Richard Cram of the MTC, “so as to lower the compliance “burden” on remote sellers.”
Carol Portman raises the point that enacting legislation and clean up measures is one thing, implementing the resulting changes is another. Departments of Revenue in states with existing remote seller legislation will continue to be very busy in 2020 updating systems, processes, and procedures to support rule changes. In fact, Illinois has delayed until January 1, 2021 the implementation of the sourcing changes that were originally enacted due to all the challenges it is raising.
Marketplace Implementation and Modification
States currently without marketplace facilitator collections laws are expected to enact legislation in 2020. Richard Cram, who heads up the MTC Wayfair Implementation and Marketplace Facilitator Work Group, senses that the recently adopted National Conference of State Legislatures (NCSL) model marketplace facilitator statute will be lobbied heavily in states without marketplace facilitator legislation. The NCSL model suggests a narrow definition of marketplace facilitator and includes certain exclusions. States with existing marketplace facilitator laws, including those with a broad definition of marketplace facilitator, will make efforts to review and modify their laws based on the uniform NCSL model statute in 2020.
The “broad definition” contains two lists of different activities, and if a business performs at least one activity in each of the lists, the business can fall within the definition of a marketplace facilitator. The broad definition leads to more uncertainty as it does not require direct or indirect customer payment processing/collection by the marketplace facilitator. Richard Cram expects there will be lobbying efforts in states with broad definitions of marketplace facilitator to seek exemptions or waivers from the definition.
Sales Tax Base Expansion
Utah enacted legislation in 2019 to expand its sales tax base to include a number of additional services and digital goods. In 2020, sales tax base expansion will be on the minds of many other legislatures across the states.
State legislatures may consider broadening the sales tax base as a means to reduce other taxes like income and property tax. Others may look to sales tax base expansion to generate new revenue for public services such as education.
Doug Lindholm of COST fears sales tax base expansion will fall under the category of 2020 “disturbing trends” from the taxpayer perspective, as he anticipates expansion efforts will primarily fall on businesses. For example, sales taxes on business to business services.
Streamlined Sales Tax Outlook
It’s unlikely that new states will adopt the full Streamlined Sales and Use Tax Agreement (SSUTA) this year, but our experts believe states will make incremental improvements that align with SST principles of simplification and uniformity. An improvement states have already started to adopt is working with Certified Service Providers (CSP) to help remote sellers manage their sales tax obligations. A CSP is an agent certified under the SSUTA to perform all of a seller’s sales and use tax functions and is designed to allow a business to outsource most of its sales tax administration responsibilities.
The SST Governing Board amended the agreement to allow non-SST states to use the agreement’s CSPs and central registration system services. For example, Pennsylvania (which is not a full member of SST) has contracted with four CSPs to allow sellers that don’t have physical presence in Pennsylvania to outsource most of their sales tax administration responsibilities to a CSP. Other non-SST and member states may follow suit in 2020.
Missouri is not a Streamlined state but has endorsed a plan that would allow CSPs to provide services in the state with services paid for by the state, says Ray McCarty. Carol Portman points out that Illinois legislature authorized the state Department of Revenue to work with CSPs in 2019, requiring the Department to meet certain CSP-related objectives by July 1, 2020.
New Exemptions & Taxes
There will always be a push for more sales tax exemptions for specific inputs, sectors, and items. For example, California created a sales tax exemption for diapers and feminine hygiene products, effective January 1, 2020. Several states will consider similar bills for these products this legislative session.
Doug Lindholm flagged the trend of state proposals for a digital advertising tax similar to the controversial excise tax in France. Maryland and Nebraska have introduced bills in 2020 to generate tax revenue from digital advertising. Maryland’s proposal creates a new excise tax on revenue from digital advertising and Nebraska’s proposal extends the imposition of sales and use tax to “the retail sale of digital advertisements.”
While no landmark sales tax decisions are expected to pop up this year, as always, you can’t sit back and relax in this field. There are too many changes you might miss! You must keep looking forward. The issues and trends our experts lay out form a great list of areas your company should dig into in 2020 to ensure compliance or seek opportunities.
Even as the dust begins to settle for economic nexus legislation, your company must continue to monitor its sales into all the states and keep up with any clean up measures that might tweak rules. As more states explore the option of contracting with CSPs, sellers will have the opportunity to take advantage of mainstream sales tax software providers’ services for free or at a reduced cost.
Marketplace sellers must ensure their marketplace facilitators are set up to collect on their behalf in states with marketplace nexus. If you facilitate a marketplace, you need to know whether the states you do business in have a broad or narrow definition of marketplace facilitator to understand your obligations.
All companies must track sales tax base expansion measures and new exemptions to make sure you’re collecting tax correctly on your products and services and taking advantage of potential cost savings. Sellers in the digital space should pay particular attention as states attempt to capture more revenue in the space.
The original post appeared on the Sales Tax Institute blog site.
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Diane Yetter, CPA, MST is president and founder of YETTER, a sales tax consulting and tax technology firm in business since 1996. She is also founder of The Sales Tax Institute, a premier think tank that offers live and online courses to educate business professionals about...