2020 sales tax changes: Midyear update

1: COVID-19 and an economy in flux

1. COVID-19 and tax
2. South Dakota v. Wayfair
3. Tax laws and revenue recovery
4. Tax on digital goods and services
5. Marketplace laws
6. Product taxability laws

Sales tax is notoriously mercurial, but when we launched 2020 sales tax changes at the end of 2019, we thought we had a pretty good idea of what 2020 would bring. Ha.

Many of our projections are coming to pass, as this report will explain. What no one anticipated was the coronavirus (COVID-19) pandemic or its impact on buying habits, businesses, and tax policies.

COVID-19 sparked new tax relief programs around the globe — some now expired; some with a longer tail. It disrupted supply chains, triggering runs on disinfectant and toilet paper while shuttering “nonessential” brick-and-mortar businesses. Yet the pandemic also accelerated trends, such as the shift toward ecommerce and digital goods and services. Zoom became a household name in a matter of weeks.

Stay-at-home policies and travel restrictions have altered how and where we spend our money, while decreasing tax collections at a time when governments are spending more. For now, states must rely on existing revenue streams, so this report will highlight economic nexus, marketplace facilitator laws, product taxability rules, and other familiar themes. Since changes in consumer habits and economic downturns often lead to new tax policies, we’ll also examine COVID-19’s impact on tax policy.

A lot has changed in the past six months, but our 2020 sales tax changes midyear update is what it always is: a recap of the sales tax changes from the first part of the year and predictions of more to come.

COVID-19

When stay-at-home orders forced brick-and-mortar businesses to close or drastically limit their offerings, some online sales took off. Comparing data from the last two weeks of March 2020 with the last two weeks of January and February, Avalara was able to track shifts in consumer spending. As could be predicted, sales of formal wear plunged, as did sales of dental services, car products, and sports equipment. On the other hand, sales of cleaning products increased by 85%; home office sales increased by 163%, and home fitness sales jumped by 210%.

Amazon was so overwhelmed by orders for essential products that it temporarily stopped taking new inventory of nonessential goods and prioritized sales of essentials. While perhaps necessary, this reveals just how much control marketplace facilitators have over what transpires through the platform. It could also compel marketplace sellers to develop other channels, such as their own ecommerce stores.

The events of recent months could do the same for brick-and-mortar businesses. Those with ecommerce stores already up and running were able to transition to online selling when in-store sales were prohibited. They could ship products or offer a buy-online-pick-up-in-store option. Even grocery stores got into the game, following the example of Whole Foods delivering online food orders, or packing them up for pickup.

Simply put, brick-and-mortar retailers that lacked an online store when the pandemic hit had a harder time reaching customers. Thus, COVID-19 will likely accelerate the shift toward ecommerce, or at least online purchase options.

Retailers with established ecommerce stores were able to focus on online selling when in-store sales were prohibited because of COVID-19.

New products, new customers, new tax obligations

Some manufacturers whose sales were depressed quickly pivoted to make products with higher demand. Thus, bathing suit and fashion manufacturers began producing face masks and gowns. Breweries and distilleries learned how to make hand sanitizer.

While brilliant, selling new products can create new or different tax obligations. A sudden increase in sales of highly sought-after items could trigger economic nexus in new states. Selling products to exempt organizations could complicate exemption certificate management. And so on. 

COVID-19 could also encourage international growth because new markets must be targeted when demand drops in familiar channels. That can be exciting. It can also lead to unexpected challenges. Cross-border sales are generally subject to customs duty and import taxes. Even different shipping methods can have consequences

Temporary sales tax relief

To help businesses whose sales plummeted because of the pandemic, some state and local governments were quick to develop tax relief programs. Sales tax relief varies by state and locality and includes:

Waiving penalties or interest on late payments, automatically or upon request

  • Alabama waived late payment penalties for small retailers with monthly retail sales averaging $64,500 or less and taxpayers in the food and hospitality industries; it did not waive interest
  • Mississippi waived penalties and interest on any unpaid tax balance until the end of the period covered by the presidentially declared national emergency

Extended filing and payment due dates for sales tax

  • California gave taxpayers filing a return for less than $1 million in sales and use tax until July 31, 2020, to file and pay sales and use tax for the first quarter
  • Florida taxpayers adversely affected by COVID-19 had extra time to file and remit taxes collected in February and March
  • Vail, Colorado, extended the due date to August 20, 2020, for sales tax collected February–June

Temporary sales tax exemptions

  • Puerto Rico temporarily exempted sales of grocery foods, disinfectants, masks, and other essentials

Payment extensions may relieve pressure in the moment, but it’s important to remember sales tax liability never disappears: It follows the business and ultimately the business owner until paid. Unfortunately, companies that use deferred sales tax collections to cover other costs (e.g., payroll or rent) could end up deeper in the hole. To help prevent that, California built a payment plan into its sales tax relief program: Penalty-free and interest-free deferred liabilities are due in 12 equal monthly installments.

Tax relief isn’t just about extensions, exemptions, and penalty waivers. Several Louisiana lawmakers proposed temporarily suspending collection of sales tax or other taxes, and some Washington state lawmakers are calling for sales tax holidays. These may be long shots, but they show how state leaders are trying to find creative solutions to an unexpected situation.

Sales tax liability never disappears. It follows the business — and ultimately the business owner — until paid.

Other U.S. tax relief

Many states are providing relief for other taxes as well, including alcohol beverage taxes, communications taxes, and lodgings taxes. When the deadline to pay then file federal income tax was pushed back to July 15, 2020, states extended their income tax due dates as well. There are also a host of federal, state, and local aid programs, some easier to negotiate than others. 

 

Global tax relief

Since COVID-19 is a global pandemic, tax relief efforts aren’t limited to the United States. Canada deferred payments of national Harmonized Sales Tax (HST) and customs duties, and many provinces implemented provincial sales tax relief. Meanwhile, Mexico is speeding up Value-Added Tax (VAT) credit repayments.

Bolivia, Colombia, Greece, Israel, Slovenia, and Thailand are among the countries that delayed VAT filings due to the coronavirus. Malaysia temporarily cut the tax on accommodation and hotel services, along with sales of tobacco and alcohol in hotels. Pakistan is looking to reduce sales taxes on basic foodstuffs. Ukraine decreased the VAT rate on domestic electricity and utilities, paused the tourism tax until the end of the year, and exempted certain medicines and hospital supplies from import VAT. The list goes on.

For businesses struggling to stay solvent, keeping track of extended due dates and rate reductions is an added stressor. To help, we compiled U.S. and global tax-related news in this COVID-19 tax relief roundup, which we update regularly.

But there’s more to tax news than COVID-19. In fact, June marks the two-year anniversary of an historic decision on sales tax. 

 

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2020 sales tax changes: midyear update