With dozens of states imposing new collection requirements on out-of-state sellers and marketplace facilitators, 2019 was a tumultuous year for sales tax. In its own way, 2020 promises to be no less turbulent.
Wayfair Fallout Continues
Like its predecessor, 2019 was all about South Dakota v. Wayfair, Inc. The June 2018 decision by the Supreme Court of the United States changed the rules of the sales tax game by allowing states to tax businesses with no physical presence in the state. Before the Wayfair decision, states could impose a sales tax obligation only on businesses with a physical tie to the state, such as a brick-and-mortar store, employees, or inventory in the state.
By the end of 2018, 19 states had adopted economic nexus, enabling them to base a remote sales tax collection obligation solely on economic activity. Last year saw that number more than double. Economic nexus laws or rules now exist in 43 of the 45 states that have a statewide sales tax, plus Washington, D.C.
That number will likely grow in 2020. Florida and Missouri have economic nexus legislation ready for their 2020 legislative sessions. If adopted as written, Florida could enforce it as early as July 2020, and Missouri by October 2020. And remote sales could be taxed even sooner in Alaska, where more than 100 local governments levy local sales taxes. Some jurisdictions are working to require remote sellers to collect by early 2020.
Collection Obligations Shift to Marketplace Facilitators
There was also a dramatic increase in marketplace facilitator laws in 2019, and there’s sure to be more on that front in 2020.
Marketplace facilitator laws require marketplaces to collect and remit sales tax for third-party sellers. A handful of states encouraged marketplaces to collect at this time last year, but most allowed marketplaces to opt out by complying with notice and reporting requirements. Today, 38 states and Washington, D.C. have marketplace facilitator laws with no opt-out option, and more are likely to adopt them in 2020.
These laws can have unintended consequences, affecting businesses that function more like a directory than an Amazon.com or eBay-style marketplace. As a result, many states could amend their marketplace laws in 2020 — heaping still more change on facilitators and sellers.
Marketplace facilitators and sellers that sell into Europe will also face new requirements.
Economic nexus and marketplace laws get the lion’s share of attention these days, but there’s a lot more to sales tax.
In the coming year, numerous states will grapple with whether to tax digital products and soda or exempt feminine hygiene products. Overall, they’ll work to better align their sales tax systems to economic trends.
For example, Utah is broadening sales tax to include dating, ride-share, and other services. It’s also slated to increase the tax on groceries and gasoline. In exchange, it will exempt menstrual products and cut income tax.
And, as always, local sales tax rates in many states will change. Often.
The Silver Lining
If there’s a silver lining to all this change, it’s that some states are looking to ease the burden of collection for remote sellers. In fact, 25 states already do.
The 24 states that are members of the Streamlined Sales and Use Tax Agreement compensate certified service providers (CSPs), like Avalara, for providing sales tax software for businesses that qualify as a volunteer seller. Pennsylvania has a CSP program of its own, and Alaska municipalities are developing one. Several other states are working to adopt similar programs in 2020 and beyond.
It’s all very exciting. Learn more about the future of sales tax in the 2020 sales tax changes report.
Gail Cole is a tax writer at Avalara, a leading provider of cloud-based tax compliance automation for businesses of all sizes.