What’s home rule? How does it affect sales tax?

For more recent information about home rule, read our 2022 post, Economic nexus, home rule, and sales tax: What businesses need to know

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 the case of the states listed above, home rule jurisdictions can establish their own sales and use tax rates and certain taxability rules. Jurisdictions in these states 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 (Form DR 1002), 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 real time suck.

Home rule, sales tax 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 was somewhat limited because they could only require a business to collect and remit sales tax if the business had a physical presence in the jurisdiction.

On June 21, 2018, 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 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; six more have adopted economic nexus laws or rules that will soon be enforced. Florida and Missouri are the last holdouts.

It's unclear what impact the Wayfair decision has on home rule jurisdictions, if any.

In Colorado, for example, economic nexus applies only 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 state-administered sales and use taxes.

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 state-administered sales and use taxes.

A handful of home rule cities in Colorado have adopted economic nexus, but there's no proof they can actually enforce it (any that try to do so will likely be sued). The Colorado Department of Revenue advises out-of-state sellers and in-state sellers to contact home-rule jurisdictions directly to determine their sales tax obligations.

Simplifying sales tax compliance for businesses selling into home rule states

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

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.”

The most efficient way to manage sales tax compliance in any state is through sales tax software. Learn more.

*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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