2016 Sales Tax Changes
What's new for the new year
The New Year is always a time of change — and sales tax in 2016 is no exception. While Congress debates over proposed legislation, many states have new rules already taking effect on January 1 or are in the process of enacting changes. The following guide offers some of the bigger changes in the works. It’s by no means exhaustive, but sheds light on emerging trends in sales tax laws. Change is coming. Here’s a look at what change might look like.
What’s proposed at the Federal / Legislative level?
2015 brought heated debate within Congress, as new measures were introduced to expand the government’s ability to impose tax collection duties on remote out-of-state businesses. If any of the following measures are passed this year, online sellers will follow a different set of rules — and many states could minimize their budget shortfalls as fast as you can say Amazon. Proponents of these bills also claim they would finally level the playing field between brick-and-mortar and ecommerce. Here’s an overview of what’s currently in (rapt) debate.
Marketplace Fairness Act of 2015 (MFA) – Just like the old one, only different
Earlier this year, several members of the Senate introduced a newly revised Marketplace Fairness Act bill, legislation similar to the 2013 MFA proposal. Essentially, this legislation grants states authority (should they meet certain criteria) to require non-exempt remote sellers to collect sales tax. If passed, the MFA would broaden state authority to require remote sellers to collect sales tax regardless of whether that business has a physical presence within those states.
The MFA would not override current state and local statutes surrounding product and service taxability, tax holidays, exemptions, or related rates, boundaries and rules. The bill would also authorize states to require remote sellers to collect and remit sales tax in accordance with state and local laws, as long as those states are in full compliance with the Streamlined Sales and Use Tax Agreement, or a member of the Streamlined Sales Tax (SST) organization, or implement a minimum set of simplification measures.
How different is the new MFA of 2015 from the original proposition? In many ways, the new bill is the same as the original introduced in 2013 with a few key differences:
- States with simplified tax code are given additional taxing authority over remote sales.
- There is a small seller exception for sellers with gross annual receipts of less than $1,000,000 in total U.S. remote sales.
- Sales are destination-sourced (the sales tax rate is based on the location where the buyer receives the product or service).
Not all out-of-state businesses would be subject to the MFA and neither would all sales transactions.
How soon will the MFA go into effect? That’s the million dollar question. Even if this bill is signed into law, it may still be challenged on grounds of constitutionality. Legal challenges would likely delay enactment.
For more information on the MFA of 2015, read the White Paper.
Remote Transactions Parity Act of 2015 (RTPA) – harder to pronounce than MFA but friendlier to small business
The Remote Transactions Parity Act (RTPA) of 2015 is similar to the MFA in that it would allow states to apply sales tax to remote sales. As with MFA, the 23 member states of the Streamlined Sales Tax (SST) initiative would be authorized to require remote sellers to collect and remit sales tax soon after legislation is passed. Non SST member states would have to adopt and implement certain minimum simplification requirements.
The small remote seller exception is different from the small seller exception under MFA. In the Remote Transactions Parity Act, remote sellers must have gross annual receipts exceeding:
- $10,000,000 in the calendar year preceding the first calendar year any State can exercise the authority provided under this Act.
- $5,000,000 in the “second calendar year any State can exercise the authority provided under this Act.”
- $1,000,000 for the “third and subsequent calendar year any State can exercise the authority provided under this Act.”
In addition, the RTPA would give catalog-only sellers a break, allowing them exemption from the law. The RTPA, like MFA, would have no effect on nexus; sales made to states with no sales tax would not be subject to tax. In addition, it would create no new taxes and have no effect on intrastate sales or the Mobile Telecommunications Sourcing Act.
Learn more here.
Online Sales Simplification Act (OSSA) – everybody pays
OSSA is quite different from the MFA 2015 and the RTPA. Most notable, perhaps, is that it does not provide for a small seller exception and it would allow states to require in-state sellers to collect sales tax on all interstate sales.
- Sales are origin-sourced (the sales tax rate is based on the location of the seller instead of the purchaser).
- A lowest combined rate of sales tax is established for remote sellers from states with no sales tax.
- Sellers remit the collected sales tax to the origin state.
- States “determine the total tax imposed on remote sales for which that State was the origin State” each month.
- The taxing authority of each participating state “shall distribute the tax collected on remote sales for which that State was the origin State to each State that was a destination State for such sales, in proportion to that State’s share of the collected tax on remote sales, using a single entity (including with respect to funding and staffing)....”
The OSSA adds layers of complexity to remote sales tax collection. Under it, “the lowest combined rate within any of the contiguous 48 States that do impose a sales tax” would be determined and remote sellers located in states without sales tax would be required to collect that “flat tax” on all remote sales.
Also, origin-sourcing makes it so a Washington state resident who purchases an item online from a Florida-based seller would pay the Florida sales tax rate instead of the Washington rate (eventually, Washington state would receive that revenue).
States that opt to not participate in this method would be prohibited from imposing sales tax on remote sales. Learn more here.
State-by-state sales tax update
Here’s a closer look at some of the highlights for 2016 at a state-by-state level.
No certificate, no exemptions!
Effective January 1, 2016, everyone seeking an exemption from Alabama sales, use, and lodgings tax must obtain an exemption certificate from the Alabama Department of
Vaping allowed…but don’t forget the new reporting requirements
The Alabama DOR reminds, “Sellers making retail sales of consumable vapor products reporting on a monthly, quarterly or annual filing frequency must comply with new reporting requirements starting January 1, 2016.” This is true “regardless of the period in which the tax accrued.”
Sweet home Alabama. State to consider collecting sales tax on ALL internet commerce
Alabama recently threw down the gauntlet to Amazon.com and other ecommerce businesses. The state now wants to make certain “out-of-state sellers who lack an Alabama physical presence but who are making retail sales of tangible personal property into the state have a substantial economic presence in Alabama for sales and use tax purposes” to register for a license with the Department and collect and remit sales and use tax.
The new rule will take effect on January 1, 2016 and apply to the sellers who:
- Make retail sales of tangible personal property in Alabama in excess of $250,000
per year (based on the previous calendar year’s sales).
- Conduct one or more of the activities described in Section 40-23- 68, Code of
Alabama will provide tax amnesty to many taxpayers in 2016
The recently-enacted Alabama Tax Delinquency Amnesty Act of 2016 creates a tax amnesty program for most all taxes administered by the Alabama DOR. While dates for the program have not yet been announced, according to the terms of the law, the amnesty program must last for a period of at least two months and take place prior to August 31, 2016.
Alabama offers get out of tax free card
The living is easy in Alaska
Alaskan seniors are about to have their exemptions reduced.
Same but different. Arizona retains uniform tax rates, while towns remain autonomous
While simplifying sales tax compliance will be a greater priority for the Arizona DOR, they still allow individual cities to add additional sales tax on top of its uniform state rates. The Model City Tax Code (MCTC) is the product of more than a decade’s work on simplifying the state’s local privilege tax administration.
Here’s a sneak peek at what’s proposed for 2016:
- City of Surprise: Effective November 1, 2015, the hotel/motel (additional tax) increased from 2.52% to 4.52%.
- Town of Gilbert: Effective January 1, 2016, livestock feed, timber services, and severance will be tax-exempt.
- City of Winslow: Effective January 1, 2016, the city will extend its 1% privilege tax for an additional 20 years (until January 1, 2036).
If standing on a corner in Winslow, Arizona were a luxury, it will cost you an extra 1%
If your annual to-do list wasn’t big enough already. Arizona now requires annual renewal of TPT licenses
All Transaction Privilege Tax (TPT) licenses in Arizona are valid for one calendar year only and must be renewed annually. TPT license renewals are due by January 1, 2016 and it can take up to 30 days to process renewals.
Partial sales tax exemptions in California to decrease
California’s Proposition 57 enabled the state to purchase bonds to reduce the state’s deficit. Under the provisions of the proposition, certain sales and purchases qualify for a partial exemption from sales and use tax. Since the bonds have now been paid in full, most partial tax exemptions will decrease by 0.25% in the New Year. Effective January 1, 2016, those who purchase the following will be affected.
- Rural investment
- Farm equipment/machinery
- Timber harvesting equipment
- Racehorse breeding stock
In 2016, race horse breeders in California will have to pony up.
One local government can’t reduce sales tax revenue received by another local government
California has enacted legislation that more strictly requires businesses to pay sales tax revenue to the city or county in which they operate. In short, the new law makes it more difficult for one locality to receive some of another locality’s local sales tax revenue.
It relates to the Bradley-Burns Uniform Local Sales and Use Tax, and it takes effect January 1, 2016. Under the Bradley-Burns Uniform Local Sales and Use Tax, which was enacted in 1956:
- Retailers with only one place of business in California must source all retail sales to that one location, unless the retailer delivers (or delivers by common carrier) the product to a destination in another state.
- Retailers with more than one place of business:
- The sale is sourced to the place of business that participates in the sale if only place of business is involved.
- If more than one place of business is involved in a sale, the sale occurs at the place where the principal negotiations take place. For example, the place where the order is taken, not the place where the order is forwarded for approval, billing, or shipment.
- As Bradley-Burns is currently written, cities and counties are “prohibited from entering into any form of agreement…that would involve the payment, transfer, diversion, or rebate of any amount of Bradley-Burns local tax revenues for any purpose if the agreement results in a reduction in the amount of revenue that is received by another local agency from a retailer that is located within the territorial jurisdiction of that other local agency, and the retailer continues to maintain a physical presence within the territorial jurisdiction of that other local agency, with specified exceptions, including an exception for an agreement to pay or rebate any Bradley-Burns local tax revenue relating to a buying company, as defined.”
The enactment of SB 533 repeals the above prohibition and instead prohibits “a local agency from entering into any form of agreement that would result, directly or indirectly, in the payment, transfer, diversion, or rebate of Bradley-Burns local tax revenues to any person…for any purpose, if the agreement results in a reduction in the amount of Bradley-Burns local tax revenues that…would [otherwise] be received by another local agency and the retailer continues to maintain a physical presence within the territorial jurisdiction of that other local agency, with specified exceptions.”
The new law also imposes “specified notification and reporting requirements on a local agency entering into an agreement that results in a reduction of the amount of Bradley-Burns local tax revenues that in the absence of the agreement, would be received by another local agency, prior to the ratification of that agreement.”
Finally, it requires “any local agency to post such an agreement on its Internet Web site, including any agreements entered into prior to January 1, 2016 that are still in effect.”
Local CA counties will impose transactions and use tax to fund transportation
The County of San Mateo, California, along with the Transportation Agency for Monterey County, are authorized to impose a transactions and use tax of up to 0.375%. These taxes may exceed, in combination with other specified taxes, the current combined tax cap of 2%. Revenue generated by these taxes would fund countywide transportation programs. These provisions take effect January 1, 2016, and “would be repealed by their own terms on January 1, 2026 if an ordinance is not approved, as specified.”
Colorado gives the postman a break. Colorado DOR encourages e-filing
The Colorado Department of Revenue will no longer mail sales and use tax forms to businesses, effective January 1, 2016. The department is also encouraging businesses to move to electronic filing.
Cigarettes, luxury items, and car washing services among many items to garner higher tax rates
District of Columbia
Increase sales tax to decrease homelessness
District of Columbia mayor Muriel E. Bowser is proposing higher sales tax rates in addition to a significant increase in tax rates for parking and electronic cigarettes. Under the mayor’s 2016 proposed budget and financial plan, $26 million in revenue would be raised by increasing:
- Sales tax to 6% across the board to fund initiatives to end homelessness
- Parking tax by 4% (from 18% to 22%) to encourage use of public transportation
- Tax on e-cigarettes so they are taxed at the same rate as other tobacco products
Let’s do it for the kids!
Voters in St. Johns County approved a half-cent sales tax increase in order to raise funds to build more schools. The rate increase will take effect January 1, 2016.
Communication Service Taxes get the hike
Two counties propose hiking Communication Services Tax (CST) rates.
Lawmakers say they’ll cut taxes in 2016 but haven’t said how
Florida says tax first, ask questions later.
Proposition to make the state’s sales tax exemption for manufacturing equipment permanent
In 2013, Governor Rick Scott of Florida pushed for and won a state sales tax exemption for equipment purchased by manufacturing businesses. The exemption, which is set to expire on April 30, 2017, costs the state approximately $137 million in sales tax revenue, annually. But if Florida Governor Scott gets his way again, it will become permanent.
Up goes sales tax, down goes property tax
The Florida House Finance and Tax Committee is considering a measure (taking effect on Jan 2017) that would swap property tax for higher sales tax.
The proposed property/sales tax swap would greatly reduce, or perhaps even eliminate, property taxes. In exchange, it would impose a sales and use tax surtax on all transactions subject to the state tax imposed on sales, use, services, rentals, admissions and other transactions.
Proponents of a lower property tax say it could lead to reduced rents and even an increase in home ownership. A “super” tax exemption could be imposed on the first $1 million of a property’s value (98% of all residential and business property in the state, according to CBS Miami). To offset such a dramatic reduction in property tax revenue, sales tax would have to increase by 4.93%.
Sales tax in Chicago over 10%
It’s official. The Cook County commissioners have approved (9-7) a 1% sales tax rate increase, which will raise the sales tax rate in Chicago to 10.25%. The additional sales tax is expected to bring in approximately $474 million annually and is scheduled to take effect January 1, 2016.
One county says to the other: raise your sales tax, we’ll raise ours
In an unusual case of quid pro quo, councils in both Normal and Bloomington, Illinois, decided to increase home rule sales taxes from 1.5% to 2.5%, which will bring the combined local rates to 8.75%.
During a summer retreat, the Normal Town Council proposed a 1% sales tax rate increase that “would be contingent on Bloomington also raising its sales tax.”
Computers may get exemption status like machinery
Expanding the items eligible for Iowa’s machinery and equipment sales tax exemption to include computers would have a positive impact on jobs, according to the Iowa DOR. Manufacturers would reduce their sales tax burden by an estimated $5-$6 million annually between 2017 and 2020, which could create revenue for job expansion.
The Big Easy gets bigger (sales tax)
Residents of New Orleans’ French Quarter approved a new quarter-cent sales tax in the French Quarter and created the French Quarter Economic Development District. New tax rates, which take effect on January 1, 2016, will be 9.25% for retail and close to 10% for restaurants.
Some 9 million tourists visit the French Quarter annually. The estimated $2 million generated by the tax increase will fund additional public safety measures in the French Quarter, such as a full-time state trooper presence.
Candy, pop, and other junk no longer part of Maine’s tax free “grocery” status
Cross the sweet stuff off your grocery list! An ever growing assortment of tasty treats will get taxed come January in Maine, as new rules no longer recognize many sugary items as groceries.
Save money being safe. State proposes gun safety tax exemptions
While gun violence taxes might occur in Seattle and Los Angeles, the entire state of Michigan takes a different approaching, offering an exemption on gun safety purchases
High cost of smoking gets higher
Tobacco products sold in Minnesota are going to get a bit more expensive in the New Year. Beginning January 1, 2016, excise and sales taxes on cigarettes and moist snuff are increasing.
North Carolina exempts jet fuel sales tax
Effective January 1, 2016 in North Carolina, aviation gasoline and jet fuel sold to interstate air businesses for use in commercial aircraft are exempt from sales tax through December 31, 2019.
In North Carolina, the friendly skies just got friendlier.
Teachers to get $5k annual raise if 1% sales tax increase approved
Oregon gets high on marijuana tax revenue
Tax-free marijuana purchases are about to run dry. Beginning January 4, 2016, all marijuana sales will be taxed at 25%. While residents may lament the added cost, they should rejoice in the ensuing revenue.
Portland's neighboring city, Vancouver, WA, received more than $790,000 in tax revenue.
Puerto Rico brings first-ever Value-Added Tax to the U.S.
State now requires exemption certificate renewal for agricultural and timber industry
Anyone wishing to claim exemption for certain items used to produce agricultural and timber products must have an Agricultural and Timber Exemption Registration Number issued by the State. No matter when an Ag/Timber Number is first obtained, it must be renewed every four years on a uniform date. All current numbers expire December 31, 2015.
Seattle introduces gun violence tax
The Seattle City Council passed a gun violence tax and mandatory reporting of lost or stolen guns. The tax is scheduled to take effect on January 1, 2016, although that could be delayed if gun-rights groups sue the city, as expected.
According to the City Council website, the bill “would establish a gun violence tax on the sellers of firearms and ammunition in Seattle.” Revenue, estimated at $300,000 to $500,000 annually, would fund research and prevention programs.
Following Seattle’s lead, Los Angeles was inspired to propose the same Legislation. http://www.taxrates.com/blog/2015/10/19/will-los-angeles-tax-guns-ammo/
Working out just got more taxing
Additional recreational services and physical fitness services will be subject to sales tax in Washington State beginning January 1, 2016.
According to the Washington State DOR, taxable physical fitness activities are defined as “activities that involve physical exertion for the purpose of improving or maintaining the general fitness, strength, flexibility, conditioning, or health of the participant.”
In short, if it’s good for you or fun, it’s subject to sales tax.
Hiyah! Martial arts gets taxed in Washington
Getting your black belt in karate just got more expensive. New legislation requires martial arts facilities to collect sales tax.
Help wanted. Wisconsin is hiring more auditors!
Work for the Wisconsin Department of Revenue and you’ll have friendly colleagues, growth opportunities, and never a dull moment (plus great benefits and work life balance). That’s according to the department’s Auditor Recruiting Video. The Department of Revenue is looking for 102 additional auditors and 11 additional agents to help uncover more than $80 million in annual revenue for Wisconsin.
If the figures in Governor Scott Walker’s February budget are accurate, “each new ‘front-line auditor’ could average about $940,000 in revenue by mid-2017.”
Beware the Minnesotans. A small army of green Wisconsin auditors will undoubtedly be a fierce force. Yet consider this: neighboring Minnesota has twice as many auditors.
The tip of the iceberg
As 2016 progresses, we’re bound to see many more changes take effect. In sales tax compliance, you can research and memorize all of the sales tax rules that affect your business on your own or you can simply automate it — and let Avalara worry about the changes.
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