The state of state tax policies after one year of COVID

After the first case of the coronavirus in the United States was confirmed on January 21, 2020, it took less than two months for COVID-19 to take the country by storm. It called for swift action: By mid-March 2020, Congress enacted the first coronavirus response act, the U.S. Department of the Treasury pushed Tax Day to July 15, and state and local tax authorities nationwide began to create a variety of tax relief measures.

Programs and policies designed to soften the economic impact of the pandemic are still being rolled out today. Former President Trump marked the end of his presidency by signing the fifth coronavirus relief bill into law at the end of 2020. His successor President Biden just signed the sixth — his first, but perhaps not his last.

In addition to addressing immediate needs, the most recent coronavirus relief bill intends to bolster future economic growth. It signals a shift away from stopgap measures and toward long-term planning and policy changes, a move states are starting to make, too.

Most sales and use tax relief programs created by states in 2020 have expired, but there are a few exceptions. Two examples: California extended a program that provides 12-month, interest-free payment plans; and Massachusetts extended certain sales and use tax as well as occupancy excise tax filing and payment deadlines to May 20, 2021.

Several states are also developing new sales tax relief programs. Some focus on the hardest-hit industries, like Colorado’s limited state sales tax deduction for qualifying bars, restaurants, and mobile food vendors. Others provide broader aid: Maryland is giving taxpayers until April 15, 2021, to file and remit sales tax and other eligible business taxes otherwise due in January, February, or March 2021; and Nevada is offering a tax amnesty program for qualifying taxpayers from February 1 through May 1, 2021.

More details can be found in our COVID-19 tax relief roundup.

Assessing the state of the states

Though vaccines promise a return to normal or near-normal life, much about the future remains uncertain. As a result, budgets for the upcoming fiscal year are proving hard to pin down. The National Association of State Budget Officers reports that as of March 1, governors in 48 states have proposed new or revised budgets for fiscal 2022. Many states, like Maryland, have decreased revenue projections for Fiscal Year 2021 from earlier estimates.

Furthermore, the pandemic is making revenue streams harder to predict. A recent report on Texas sales tax revenue revealed that while retail sales tax receipts increased in February 2021, receipts from oil and gas sectors sharply declined. Receipts from the services sector, restaurants, and bars also remained down.

States in need of more revenue, either because of collection shortfalls or increased expenditures, may decide to broaden or increase sales and use taxes. Some are already moving in that direction.

New taxes

Maryland recently enacted the first digital advertising tax in the country; originally scheduled to take effect March 14, 2021, it may be pushed back to January 1, 2022. It’s being challenged whether it takes effect sooner or later, but that’s not stopping other states from following its lead: Connecticut, Indiana, Massachusetts, New York, and Washington are among the states considering some sort of tax on digital ads in 2021.

Maryland is also extending sales and use tax to digital products obtained or delivered electronically, starting March 14, 2021. Georgia may do the same come July 1, 2021. Kansas is considering taxing digital property and subscription services, and Wyoming may extend sales tax to streaming or subscription services that don’t provide the purchaser with permanent use of the specified digital products.

Simply put, states that don’t already tax digital products are increasingly likely to do so — Colorado started taxing digital goods and streamed services on January 30, 2021. And those that already tax them may seek to acquire more revenue by raising the tax rate: Maine is looking to raise the tax rate on digital subscription services.

Some states may also look to broaden sales and use tax to services that are currently exempt. The Vermont Tax Structure Commission has determined that “the broader the base, the less likely a particular crisis is to have a disproportionate negative effect” on revenue. “If we taxed groceries, …  COVID would have been much less damaging to state revenue.” The Commission finds that “the widespread exclusion of services [from the sales tax base] adds complexity, unfairness, and instability to Vermont’s tax system and inflates Vermont’s sales tax rate.”

Higher rates

Nebraska may tax additional services and increase the sales and use tax rate. Keeping the sales tax base but raising rates is another option. Lawmakers in Mississippi and West Virginia are considering legislation that would increase the general sales and use tax rate by up to 2.5%; some special sales tax rates (e.g., the rate for certain equipment used in logging) in Mississippi would also rise.

Higher taxes on cigarettes, tobacco, and vaping products have been proposed in Indiana, Kansas, and West Virginia. Nationwide, the trend is toward increasing the taxes on these products. 

However, states aren’t only interested in raising rates. For example, Alabama, Kansas, and Mississippi may reduce the sales tax on food for home consumption. Illinois is considering reducing the tax on diapers and baby wipes.

New sales tax holidays

To help boost sales at restaurants and bars, which have struggled during the pandemic, Tennessee held a sales tax holiday for restaurant food and drink in August 2020. This year, it may establish a small business sales tax holiday during the 2021 Labor Day weekend. Lawmakers may also ask the Tennessee Advisory Commission on Intergovernmental Relations to study the effectiveness of sales tax holidays as temporary tax relief.

New sales tax holidays have been proposed in several other states, including California (for emergency preparation items and school supplies), Florida (for school supplies and small businesses), Indiana (for school supplies), and New York (for water-conserving products). Some of these tax-free periods will likely be adopted — Florida doesn’t have an annual sales tax holiday but typically offers at least one each year — but it’s unlikely all will make it into law. (Remember Bill from Schoolhouse Rock?)

If a year of COVID-19 has taught us anything, it’s that we don’t know what the future will hold. Keeping informed of proposed and forthcoming changes is a good way to brace yourself for whatever comes. Automating tax compliance can help you determine your tax obligations; register, calculate, file and remit taxes; and manage exempt sales. Learn more at avalara.com.