USA: 2020 sales tax changes midyear update: Sales tax revenue edition

Sales Tax update & Digital Service Taxes on the Rise

Despite strong online sales, COVID-19 continues to stress state and local budgets. In the coming months and years, government officials may need to find new sources of revenue. As one of the largest sources of both state and local revenue, sales tax is a natural target.

Expect states to tighten enforcement of economic nexus and marketplace facilitator laws, which require out-of-state sellers to collect and remit sales tax. States could also look to impose new taxes on sales of digital goods and streaming services.

Economic nexus and marketplace facilitator laws are proving to be an invaluable source of revenue during the pandemic.

According to the Texas Comptroller, “ecommerce collections have risen sharply” because “more remote vendors and online marketplaces were required to collect and remit Texas sales tax following the U.S. Supreme Court’s Wayfair decision and subsequent Texas legislation” (referring to the high court’s decision in South Dakota v. Wayfair, Inc.). Indeed, “revenue from sales taxes collected by online marketplace providers … is exceeding previous expectations and thus reducing the draw on general revenue funds.”

That’s not the case in Florida, which is heavily dependent on sales tax revenue but has no remote sales tax law. State officials expect sales tax collections to drop $2.84 billion in fiscal year 2020–21, and $1.25 billion in FY 2021–22, “with about one-half of the loss each year attributed to severely dampened sales in the Tourism and Recreation sector.”

Although taxing remote sales could help Florida’s COVID-19 budget crisis, the state is unlikely to adopt a new remote sales tax law prior to the next legislative session (scheduled to start March 2, 2021). Florida lawmakers have introduced economic nexus and marketplace facilitator legislation in the past, but the bills have never had enough support to make it into law.

In Missouri — the only other state with a general sales tax that doesn’t tax out-of-state sales — the House Local Government Caucus is urging Governor Mike Parson “to call a special legislative session to establish a Wayfair tax law in Missouri.” Representative Donna Baringer noted that online retail sales have “skyrocketed” during the pandemic, while municipalities have lost revenue as economic activity has dropped, especially for small businesses and brick-and-mortar stores.”

Now that everything from fitness classes to school to wine tasting parties has moved online, states have new motivation to tax digital transactions. Many were moving in that direction anyway, but such changes take time. Although the U.S. transitioned to a service-based economy years ago, sales tax laws still largely focus on tangible personal property. Economic stresses brought on by COVID-19 could inspire lawmakers to act where previously they’ve dragged their feet.

State and local governments are also likely to pursue new taxes on streaming services. Millions of Americans are relying on Disney+, Hulu, Netflix, Prime Video, and other streaming services for entertainment during the pandemic, where once they may have tuned into cable. Yet tax codes are still geared more toward cable than streaming services. That’s likely to change in the coming months and years.

Source: Avalara