2020 sales tax changes: Midyear update

6: Product taxability laws

Never content to simply tax the taxable and exempt the exempt, states continue to tweak their product taxability laws. For example:

Digital products

The Maryland General Assembly passed a bill that would tax the retail sale and use of digital codes and digital products starting July 1, 2020, and another that would tax annual gross revenues derived from certain digital advertising services. Governor Larry Hogan vetoed them both, explaining they would raise taxes on Marylanders “at a time when many are already out of work and financially struggling.” It’s unclear whether he would have signed the measures had there been no coronavirus pandemic.

A measure still alive in Nebraska seeks to broaden sales tax to numerous services as well as digital products. It would also reduce the state sales tax rate from 5% to 4%. The bill may be discussed when the Legislature reconvenes in July, after breaking early because of COVID-19.

Groceries, guns, and gun safes

Certain gun safes will be exempt from Virginia sales tax starting July 1, 2020. Meanwhile, the South Dakota Legislature introduced a measure to exempt firearms from retail sales and use tax, while Iowa lawmakers proposed a new sales tax holiday for firearms and firearm ammunition. If approved, it would be held “during the period surrounding Independence Day.”

Sales taxes on groceries could be a topic of discussion in the coming months. Prior to the COVID-19 crisis, Alabama was looking to eliminate the sales tax on groceries, which would put it more in line with most other states’ policies. Yet since grocery sales — and especially online grocery sales — surged because of the pandemic, states in need of more tax revenue may consider broadening sales tax to groceries. It would likely be a tough sell.

Menstrual products

Calls to exempt feminine hygiene products are sounding in numerous states, including Missouri and Tennessee. Missouri is looking to cap the sales tax imposed on feminine hygiene products, subjecting them to the lower rate imposed on food (currently 1.225%). And a measure introduced in Tennessee would add menstrual products to the list of items qualifying for the state’s annual sales tax holiday; headlines screamed about one lawmaker’s concerns that women would take advantage of the tax break to stockpile feminine hygiene supplies — but this was before the COVID-19 run on toilet paper and hand sanitizer.

The sales tax rate on essential personal hygiene products was reduced to 2.5% in Virginia on January 1, 2020. In Washington state, these products are exempt from sales tax starting July 1, 2020.

 

Since grocery sales — and especially online grocery sales — surged because of the pandemic, states in need of more tax revenue may consider broadening sales tax to groceries. It would likely be a tough sell.

Looking ahead

The coming months, like those recently passed, will call for adaptability and ingenuity. According to the United Nations, “nearly 90 per cent of the world economy has been under some form of lockdown, disrupting supply chains, depressing consumer demand and putting millions out of work.” Moving forward, businesses will need to do more with fewer resources.

The U.N. also expects the pandemic to accelerate digitalization and automation and lead to a “rapid surge in economic activities online.” Automating essential tasks like registration, sales tax collection, and filing and remittance is a good first step.

This report is a snapshot of overarching trends. We also track news as it happens. Look to our comprehensive resources for the latest on transaction tax in the U.S. and abroad:

COVID-19 hub: The go-to page for COVID-19-related tax news and insight

Avalara blog: U.S. sales tax news and trends

VATlive: International VAT and sales tax news and insight

Sales tax laws by state: A breakdown of sales tax laws affecting out-of-state sellers

Sales tax risk assessment: Find out where you could be on the hook for economic nexus

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