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What You Need to Know About Home Rule and Effects on Sales Tax

Aug 23rd 2019
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When it comes to sales tax, “home rule” refers to cities, counties or other local governments that have the authority to administer and establish their own sales tax rates and rules.

In the five states that allow localities to have total home rule* — Alabama, Alaska, Arizona, Colorado, and Louisiana — sales tax compliance can be extremely challenging for businesses. It’s especially so for remote sellers with nexus, or an obligation to collect sales tax.

Home rule authority varies by state and by jurisdiction, but in general, home rule jurisdictions can establish their own sales and use tax rates and certain taxability rules. These jurisdictions may require businesses to file sales and use tax returns and remittances directly with the local tax department (rather than with the state department of revenue), and they may have a different filing schedule than the state.

Brick-and-mortar businesses located within a home rule jurisdiction quickly learn the ropes. Figuring out the sales tax system is harder for remote sellers required to collect and remit sales or use tax in a home rule jurisdiction. Therefore, businesses that sell into multiple home rule jurisdictions typically must devote an inordinate amount of time and effort to sales tax compliance.

Consider Colorado. There are 272 municipalities in Colorado, of which 97 are home rule municipalities. They determine whether local sales and use tax applies to more than a dozen types of sales that are exempt from the state sales and use tax, including food for home consumption and renewable energy components. If a home rule jurisdiction opts to tax any sales that are exempt from state sales tax, the seller needs to know to collect local sales tax but not state sales tax.

The Colorado Department of Revenue publishes helpful information about local sales tax rates and taxability rules for state-administered home rule jurisdictions (find it here), but approximately 70 of the 97 home rule jurisdictions in Colorado administer their own sales tax. To learn sales and use tax rates and which sales are exempt in these jurisdictions, businesses must contact the local tax authority directly. It can be a serious time suck.

Home Rule, Nexus and a Compliance Nightmare

Home rule jurisdictions have been around for decades, and they’ve always complicated sales tax compliance for certain businesses. Yet their reach used to be more limited because they could only require a business to collect and remit sales tax if the business had a physical presence in the jurisdiction.

That changed on June 21, 2018, when the Supreme Court of the United States overruled the physical presence rule in South Dakota v. Wayfair, Inc. The court determined that a remote seller’s economic and virtual ties to a state (and by extension, a locality) could be a sufficient basis for nexus. This is economic nexus.

Most states now require remote sellers with economic nexus to comply with their sales tax laws. Of the 45 states that have a statewide sales tax, 37 (plus Washington, D.C.) currently enforce economic nexus, while six more have adopted economic nexus laws or rules that will soon be enforced. Florida and Missouri are the last holdouts.

The Wayfair decision also allows home rule jurisdictions to require remote sellers to collect their local sales and use taxes. Thus, to return to Colorado, more sellers can now be required to collect state and local sales taxes.

Colorado’s economic nexus law applies to businesses with more than $100,000 in sales in the state in the current or previous calendar year. As of June 1, 2019, sales and use tax rates in Colorado are based on the destination of the sale (the buyer’s address when the sale is shipped to the consumer). Out-of-state businesses with economic nexus are required to collect and remit all applicable sales and use taxes, including those imposed at the local level by home rule jurisdictions.

There are slightly different rules for Colorado’s in-state sellers. Those with less than $100,000 in sales in Colorado during the previous calendar year can continue to use origin sourcing, basing the sales tax rate on the seller’s business location. Once they cross that $100,000 threshold, however, they must switch to destination sourcing within 90 days and collect all applicable sales and use taxes. Sales tax compliance in Colorado has always been complicated. Now, that complexity affects more businesses.

Simplifying Sales Tax Compliance

Some home rule states have taken steps to simplify sales tax compliance for remote sellers. For example, Alabama has established a Simplified Sellers Use Tax (SSUT) program: Remote sellers can collect a flat 8 percent SSUT on all sales shipped into Alabama, regardless of the destination of the sale.

Louisiana will begin enforcing economic nexus no later than July 1, 2020. To simplify sales tax compliance for remote sellers, the legislature established a single, state-level tax administrator for remote sales: The Louisiana Sales and Use Tax Commission for Remote Sellers. It’s still in development, but the plan is for remote sellers to collect a single rate on their sales into Louisiana, much like Alabama’s SSUT.

Businesses used to have to file Arizona’s state transaction privilege tax (TPT) with the Department of Revenue and local TPT with certain local tax authorities. It was complicated. As of 2017, Arizona requires businesses to file TPT through the Arizona Department of Revenue. This will greatly simplify sales tax compliance for remote sellers once they’re required to collect and remit TPT on October 1, 2019, under the state’s new economic nexus law.

Alaska doesn’t have a general sales tax, but home rule jurisdictions can impose a local sales tax. Many do, and many are interested in taxing remote sales. The Alaska Municipal League wants the 100+ taxing municipalities to “work together toward a single-level, statewide administration of online sales tax collection and administration.”

*Some states, including Illinois and West Virginia, allow more limited home rule (local jurisdictions don’t administer their own sales tax). This drastically reduces compliance hassles for sellers.

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Why Businesses Absorb Sales Tax in More States

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By jvorndran
Sep 6th 2019 22:11 EDT

Gail - I don't think home rules can rely on the Wayfair decision as that decision required simplified reporting at the state level, and was for states not local jurisdictions. I think HR cities might try to hang their hat on Wayfair - but that would hardly be what the Supreme Court was intending given their desire for simplifcation and we both know that that is not the case with home rules.
The Supremes required the following six items (1) a safe harbor excluding those who sell only limited amounts in South Dakota; (2) no retroactive tax collection; (3) single, state-level administration of sales taxes; (4) a simplified tax rate structure; (5) uniform definitions and other rules; and (6) access to software provided by the state, with immunity for those who rely on it. A state that attempts to collect sales taxes on e-commerce without these provisions will almost certainly face a legal challenge, with challengers of such laws able to point to the rationale in the Wayfair ruling as guidance of what’s permissible.

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