The world threw a lot at us in 2021: an unyielding pandemic, a volatile economy, a broken supply chain, labor shortages, wildfires, and a blocked canal. Who could have predicted all these events would impact tax?
We don’t know if we’ll find everything we want on the shelves this year, but two things are certain: Changes in tax will be widespread and businesses all over the world will do what they do best — work tirelessly to thrive in spite of uncertainty.
The tax experts at Avalara have developed its most comprehensive report to date. Here you’ll find everything from big changes in the U.S. to emerging international trends. You’ll also get deep insights into key industries, such as retail, manufacturing, software, among others.
There’s a lot to take in, so bookmark this page and buckle up.
Introduction
Never have individuals, businesses, and governments worldwide been so interconnected and reliant on one another. A ship blocks a canal in Egypt and a shelf can’t be restocked in Ohio. A COVID-19 outbreak in a factory in Vietnam clogs ports in Los Angeles. Fires in California affect wine poured in Montreal. A dearth of truck drivers empties gas pumps in Britain as a global labor shortage stresses the world’s hospitality industry. The litany goes on.
Against this backdrop, and with an unpredictable virus hard on the heels, businesses must navigate a complex web of regulations and requirements to be in compliance, often across multiple states and countries. Governments worldwide are mandating the digitization of invoicing and tax reporting to reduce the tax gap; some are even working together to eliminate corporate tax advantages. Compulsory transparency is forcing businesses to up their compliance game.
Government regulations can be difficult to track and understand during the best of times, when there’s minimal geopolitical and commercial upheaval. In the current environment, with the pace of change accelerating, it’s extremely challenging for businesses of any size to keep up with adjustments to rates, boundaries, deadlines, and overall tax compliance responsibilities.
Our sixth annual tax changes report is born of the wealth of knowledge held by the tax compliance experts at Avalara. It surveys the key domestic and international tax policy developments of the day and explores emerging trends in taxation and compliance. Avalara is committed to ensuring tax compliance doesn’t interfere with the growth or success of your business.
Sales tax changes
Like so many other aspects of daily life, sales and use tax compliance has been affected by the pandemic. In fact, the top three risks to growth in 2022 are 1) the pandemic, 2) supply chain disruptions (triggered by the pandemic), and 3) inflation. Although most COVID-19 tax relief programs have concluded, the pandemic is affecting sales and use tax in other ways: Clogged supply chains have compelled businesses to seek new supply chains, which can lead to new tax obligations; the astounding growth of ecommerce, sparked in part by a desire to avoid stores, has pushed many businesses over economic nexus thresholds in numerous states. Yet a recent survey found that many unregistered small businesses with significant sales in other states believe themselves to be compliant.
Digitalization is another interesting development in transaction tax compliance. Tax officials in numerous countries are gaining access to underlying sales data so they can ensure businesses collect and remit tax as required. Increasingly, self-reporting tax is shifting to a system in which tax authorities must validate invoices in real time or near-real time. Although the United States isn’t leading these efforts, it’s watching the digitalization of tax reporting in other countries with interest. In a step toward digitalization, tax authorities in numerous states are mining data to identify good candidates for audits.
Global tax changes
Global ecommerce is expected to surpass $4.9 trillion in 2021 and continue upward in 2022 and beyond. Unfortunately, the large volume of cross-border shipments is straining a global supply chain already stressed by COVID-19. Given the backlogs at customs, it’s more critical than ever to label cross-border shipments with the proper Harmonized System (HS) code — and many of these are changing effective January 2022.
2022 will also bring a greater push toward digitalizing tax compliance in many countries, including the U.K., which is still smarting from Brexit. Already, companies doing business in the EU and U.K. are adjusting to new collection and reporting requirements resulting from ecommerce tax reform efforts, and everyone is waiting to see what the new global minimum tax deal will bring. Meanwhile, companies selling into North America are adjusting to the new NAFTA: The United States-Mexico-Canada Agreement (USMCA).
Industry tax changes
No industry has escaped the pandemic unscathed, though COVID-19 has impacted different industries in different ways. For close to two years, businesses able to sell online for delivery or pickup have generally fared better than those reliant on foot traffic. This has been particularly true for restaurants and bars, which have benefited from new laws allowing delivery and takeout sales of alcohol. At the same time, selling online and through marketplaces can complicate sales tax compliance for retailers, restaurants, and beverage alcohol sellers.
Manufacturers plagued by labor and supply shortages must continue to properly document exempt sales, claim tax credits, or navigate forays into direct sales. Meanwhile, software and communications companies are dealing with the fact that the pandemic has “accelerated digital transformations” and turned a spotlight on how such sales are sourced and taxed. The tobacco and vape industry could experience an increase in electronic filing enforcement in 2022, as well as a move toward uniformity standards. In the energy sector, states will likely continue to try to balance the need for cleaner vehicles with the need for fuel tax revenue. And as the hospitality industry continues to deal with fallout from travel restrictions, it could be buoyed by the fact that many of us will travel whenever, wherever, and however we can.
