Avalara Tax Changes 2022

Industry tax changes

Avalara Tax Changes 2022

Industry tax changes

Hospitality

COVID-19 will almost certainly continue to disrupt hospitality and tourism in 2022, but if the past is a harbinger of future trends, people will travel if they can, when they can, and how they can. Hospitality businesses able to adapt to new challenges and meet changing consumer demands will be most successful.

What the numbers tell us:
 

Source: HVS

Source: HVS

COVID-19 aftershocks

The pandemic’s effect on the hospitality and tourism industry has been monumental, with year-over-year travel spend dropping by 42% (almost $500 billion) in 2020. The hotel industry is expecting to have $59 billion less business travel revenue in 2021 than in 2019. These are difficult times.

Though travel for leisure seems to be bouncing back, business travel is still lagging. This is concerning because “business travel is the hotel industry’s largest source of revenue.” The American Hotel & Lodging Association (AHLA) predicts business travel revenue won’t reach pre-pandemic levels until 2024, and McKinsey & Company expects overall corporate travel spending to decline even as business travel resumes. 

But there are hopeful signs on the horizon. Travel spending in the United States improved steadily January through July 2021 before dropping a bit in August. Research commissioned by SAP Concur (April through May 2021) suggests global business travelers are ready to get back on the road.

Source: SAP Concur

Source: SAP Concur

Source: SAP Concur

Source: SAP Concur

Until travel returns to its pre-pandemic heights, some hospitality businesses are finding creative ways to fill rooms and cater to what customer demand there is. Whenever new processes or business models are adopted, it’s important to keep compliance top of mind.

STAFFING CHALLENGES AND THE RISE OF ROBOTS

Like many businesses in the service sector, the hospitality industry is experiencing a labor shortage. According to AHLA, “Hotels are expected to end 2021 down nearly 500,000 jobs compared to 2019.”

With fewer bodies available to handle essential tasks, guests at some hotels are going without turndown service or other amenities. And in some hotels, guests are getting help from a new source: robots.

Robot employees in hotels aren't new. Starwood Hotels (since acquired by Marriott) explored the use of robots in 2014, launching a butler named “botlr” in a Silicon Valley hotel. Once COVID-related travel restrictions eased a bit, the hotel chain began offering The Bot Experience, a hotel deal that comes with an in-room robot. 

The Japanese Henn na Hotel invited robots into the workforce in 2015. They were “hired” to answer questions, clean rooms, mix cocktails, store luggage, and perform other essential (and nonessential) tasks. But things didn’t work out quite as planned, and by 2019, the hotel had decided to “lay off more than half of its 243 robots.”

In addition to filling staff vacancies and potentially improving operational efficiency, robots may cater to guests’ desires for less interaction during a pandemic; they certainly eliminate awkward interactions with porters lingering to secure a tip. Robots can sterilize spaces in a way human counterparts can’t. And robots don’t ever ask for a raise or time off.

Source: AHLA

So, robots could be a win-win for hotels and their guests. 

Yet there are potential downsides. Many travelers enjoy casual interactions with hotel staff, and such social contact may hold even more appeal in a post stay-at-home-order world. Employees who are concerned robots will eliminate jobs or erode their bargaining power could strike, like workers in Las Vegas did in 2018, further exacerbating staffing woes. 

If hotels use robots to sell food, beverages, or other items to guests, they’ll need to figure out how to calculate the tax due on those sales. Pamela Knudsen, senior director of compliance services at Avalara, explains: “Tax on those sales will need to be calculated either ‘by’ the robot at the time of purchase or included in the cost of the product and then netted out in order to remit. The technology will need to exist for this information to be passed back and forth.”

HOTELS THINK OUTSIDE THE BOX TO FILL ROOMS

HOTEL AS HOSPITAL

With hotel occupancy down and hospital occupancy up, hotels the world over started catering to a new type of guest during the first wave of the pandemic: asymptomatic or mildly ill COVID-19 patients. Hotels have also housed first responders and healthcare professionals.

It’s brilliant, really, and it gave sorely needed revenue to hotels at a time when most people weren’t traveling for business or pleasure. Michael Jacobson, CEO and president of the Illinois Hotel and Lodging Association, said the money the city of Chicago paid to lease all the rooms in several hotels during the spring of 2020 was “the bare minimum just to break even.”

These programs can also come with tax implications since lodging taxes usually apply to stays of less than 28 or 30 consecutive days. Do lodging taxes extend to long-term guests who are ill, quarantining, or caring for ill people? Should they? Answers may vary from state to state, or by city within states, and Knudsen says some jurisdictions are looking to change that time frame from 30 days or less to 60 or 90 days or less to offset this trend.

Source: CNBC

HOTEL AS OFFICE OR SCHOOL

The InterContinental New York Times Square served as temporary housing for medical staff in the spring of 2020. After those guests left, it turned some rooms into office space. Across the country, a Beverly Hills hotel transformed rooms into work spaces.

Some creative hotels catered to desperate parents whose children were in remote school: Five families rented a conference room in a Courtyard by Marriott hotel in Illinois so their kids could have a pseudo-classroom experience. A Great Wolf Lodge in Pennsylvania offered remote-learning facilities.

Do lodging taxes, rental taxes, or other taxes apply to rooms rented as office space by the day, or to a meeting room used as a school? Should they? Does a hotel meet the definition of a hotel if it’s acting like an office or WeWork location? Any time traditional operations are altered, possible tax or compliance ramifications must be taken into consideration.

Knudsen hasn’t heard of any legislation that would change the taxes if someone uses their room as an office because they’re still using it as lodging. However, she believes lodging establishments that provide a separate working space for guests will appeal more to people who can work from anywhere.

FEEDING GUESTS: TAX DEPENDS ON WHAT YOU SERVE AND HOW YOU SERVE IT

Though restaurants across the country and around the world are once again open for in-person dining, some people are still uncomfortable eating in restaurants. In its September 29, 2021, tracking study of American travelers, Longwoods International found that 20% of respondents disagreed or strongly disagreed with the statement, “I would feel safe dining in local restaurants and shopping in retail stores within my community.” 

Hotels offering alternatives to in-person dining, such as room service, will appeal to some travelers. Those properties able to elevate alternate dining options will fare even better.

Whenever a business sells food or beverages — especially prepared food and alcoholic beverages — taxes mustn’t be overlooked. The taxes on these products can be quite different from hotel and occupancy taxes.

For example, sales of prepared food are often taxed at a different rate than food for home consumption (which hotels may also sell). Thus, a salad sold through a hotel restaurant would likely be taxed differently than a banana sold at the gift shop. 

Sales tax generally doesn’t apply to prepared food that’s given away (e.g., a complimentary cookie or continental breakfast), but use tax might: It would depend on the state. In Washington, for example, “A hotel’s purchases of food and food ingredients used in complimentary meals served only to hotel guests are not subject to retail sales tax at purchase because they are purchased for resale, and their subsequent intervening use is not subject to use tax pursuant to the statutory exemption for food and food ingredients.”

Chicago levies a special tax on bottled water, and in some parts of the country and world, sweetened beverages like soda are taxed differently than unsweetened teas. Candy is sometimes subject to different tax rates than other foods. And coffee? Taxability can hinge on whether it’s hot or cold, prepared or prepackaged, and whether the seller provides a place to sit and drink it. There’s a lot to keep track of.

Then there’s alcohol. Often subject to sales and use tax, beverage alcohol can be subject to alcohol excise tax, excise tax, liquor excise tax, liquor luxury tax, or other taxes, depending on state and sometimes local jurisdictions. How the alcohol is served or sold must also be taken into consideration. A bottle of wine sold at the gift shop could be taxed differently than a bottle of wine sold through room service. A glass of wine or martini at the bar may not be taxed the same as a ready-to-drink (RTD) cocktail or bottle of beer sold through the in-room minibar.

Other considerations: When a room-service order contains beer or wine, can an 18-year-old employee carry it to the room? Are tips subject to sales tax? What about mandatory service fees? And are there special licensing requirements for alcohol sales? Businesses in the hospitality industry must consider these and other factors before expanding menu options or offering new items to guests.

ENTERTAINING GUESTS: STREAMING TAXES COMPLICATE TAX COMPLIANCE FOR THE HOSPITALITY INDUSTRY

If you run an ice hotel in Scandinavia, your guests may be more interested in watching the northern lights than an episode of “Ted Lasso.” However, guests may expect most hotels to come with free Wi-Fi and streaming services so they can stay connected to the office or school and enjoy movies, sports, or favorite shows.

As with all other goods and services hospitality businesses provide, streaming and internet services are generally subject to tax. And unfortunately, these can compound the complexity of transactional tax management. This is especially true for companies with properties in multiple tax jurisdictions, because taxes on streaming services vary considerably from place to place and sometimes involve taxes other than just sales tax.

For example, there’s a 9% amusement tax on streaming entertainment in Chicago and an excise utility tax on streaming services in Kentucky. Several jurisdictions in California impose a local utility use tax on streaming services, though they’re being challenged for doing so. A dedicated communications services tax applies to streaming subscriptions sold in Florida. 

Furthermore, many states still haven’t settled on how to tax streaming services. Thus, the Colorado Department of Revenue decided certain digital goods and services were subject to sales tax as of January 30, 2021. A few months later, Governor Jared Polis signed a bill specifying that monthly subscription fees for internet streaming services and electronic downloads are taxable. And West Virginia recently clarified that although digital products are exempt from sales and use tax, streaming services are subject to tax.

More information about taxes on streaming services can be found here.

Source: Avalara Tax Desk

Unique concerns for short-term rentals

Depending on the amenities and services offered, short-term and vacation rental owners and operators may also need to deal with beverage alcohol taxes, consumer use tax, food taxes, parking taxes, sales and use taxes, streaming taxes, and a host of other taxes (e.g., business personal property tax on certain equipment). 

At a minimum, hosts need to know which taxes are applicable. For example, if you charge a cleaning fee, is that fee subject to sales tax? If you add a separate charge for parking, is there a parking tax? Stuff like that.

Lodging and occupancy taxes cannot be overlooked, of course. Requirements vary considerably from state to state and, within states, from address to address. Many local jurisdictions impose local lodging taxes on top of state taxes, so it’s important to always verify requirements with local governments.

In some states and localities, Airbnb, Vrbo, and similar online platforms or marketplaces may be required to collect and remit applicable occupancy taxes on behalf of their hosts — though hosts generally remain responsible for other state and local tax obligations. In others, hosts bear the full burden of tax compliance responsibility. If you book through multiple sites, including your own website, you need to be sure these taxes are collected and remitted as required.

Source: HVS

It’s also important to keep your finger on the pulse of changing tax requirements. For example, one bill introduced in Michigan in October 2021 would impose a statewide 5% excise tax on short-term rentals; another measure being discussed in the Wolverine State would allow local governments to tax short-term rentals.

Lastly, there’s an existential crisis in the short-term rental industry: Should they even be allowed to exist? And if so, which jurisdiction (state or local) should govern them? These types of discussions have been going on for years and they’re unlikely to go away in 2022.

Some local governments are keenly interested in gaining more control over short-term rentals. A bill under consideration in Florida would give cities and counties more control over vacation rentals starting July 1, 2022. Currently, local laws, ordinances, and regulations in Florida cannot prohibit vacation rentals or regulate the duration or frequency of stays. House Bill 6033 would give localities the authority to do just that. 

On the other hand, there are calls to restrict how much local governments can regulate the short-term rental industry. Michigan House Bill 4722 would prohibit local governments from banning short-term rentals. 

“Communities struggling to accommodate both proponents and detractors of short-term rentals need to educate the community about their benefits and the potential negative impacts of banning them,” says Knudsen. “They should also enforce compliance regulations that help ensure short-term rentals are good neighbors.” 

More details about state and local short-term rental tax rules can be found here and in our lodging tax blog.

HOW ROOMS ARE BOOKED AFFECTS HOW THEY’RE TAXED

Some states started requiring online travel sites like Airbnb and Expedia to remit taxes on behalf of hosts years ago. Now, local jurisdictions want in on the game. Many local governments today have their sights set on large online travel agencies (OTA) and marketplaces. This is a second wave of compliance regulation, and it’s hitting some businesses hard.

According to Knudsen, “The definition of a ‘marketplace’ continues to expand not only to platforms such as Airbnb or Vrbo, but also to property management groups. Whereas before, property managers managed bookings, cleaning, repairs, etc., they’re now increasingly required to collect and remit on behalf of the owners of the properties they manage. This entails developing a whole new area of expertise in the calculation, collection, and remittance of a multitude of taxes at both the state and local level. In addition, many jurisdictions are requiring marketplaces to enforce compliance or exclude noncompliant properties from their site. The fines levied on these marketplaces for not ensuring the listed properties are in compliance can be quite hefty.”

West Virginia lawmakers passed a bill in 2020 that required marketplace facilitators to collect and remit local lodging taxes in the state. The measure ended up being vetoed by Governor Jim Justice over technical flaws, but proponents intend to try again.

Source: Airbnb

A similar effort in Virginia was more successful. Starting September 1, 2021, Virginia requires retail sales and use tax to be calculated “based on the total charges or the total price paid for the use or possession of transient lodgings, including any fees charged by accommodations intermediaries for the facilitation of transactions for the provision of transient accommodations.” OTAs and marketplaces are now the dealer liable for any tax due, including local taxes that may need to be remitted directly to the locality.

The decrease in short-term rental and hospitality tax revenue is driving some of this interest. Oliver Hoare, general manager of lodging at Avalara, explains: “With less funds in a typical year, the pressure on compliance within lodging and hospitality is going to be laser focused. At the same time the lack of occupancy in some channels (e.g., hotels) is forcing companies to think more about how to be more efficient.”

 

These are some of the many factors affecting the hospitality industry today. Others include:

To stay on top of tax changes affecting the hospitality industry, stop by the Avalara Tax Desk.

Beverage Alcohol

For the beverage alcohol industry, 2021 was fraught with challenges and rife with opportunities. These will likely continue into 2022.

What the numbers tell us:

Let’s get to it.

Direct-to-consumer channel wars

Expect a lot of ink to be spilled on direct-to-consumer (DTC) sales in 2022, for several reasons.

The wine industry has long dominated this channel, with wineries currently shipping to roughly 97% of the U.S. population. Every state where DTC wine shipments are permitted can have unique registration and tax requirements as well as volume limits. For example, Washington, D.C., doesn’t require remote wineries to obtain a special permit to ship DTC, while Hawaii does; in fact, there’s actually a license for each county in Hawaii. See our state DTC wine shipping rules for state-specific details.

Source: Avalara Tax Desk

The only two states that fully prohibit wineries from shipping directly to consumers are Mississippi and Utah, and both are moving toward allowing DTC shipments: Mississippi allows wineries to ship directly to a licensed package retailer on behalf of a purchaser, and Utah will soon allow the Department of Alcohol Beverage Control to purchase wine subscriptions on behalf of individuals. Baby steps, but steps nonetheless.

DTC privileges for breweries, distilleries, and even retailers lag far behind their wine-producing counterparts. As of November 2021, breweries can ship DTC in nine states and Washington, D.C. Distilleries can do so in six states plus D.C., while retailers can ship DTC in 13 states, plus D.C.

Source: Avalara Tax Desk

Source: Avalara Tax Desk

Source: Avalara Tax Desk

Already operating at a disadvantage in this space, breweries, distilleries, and retailers recently lost a little ground. Nevada took itself off the short list of states where breweries, distilleries, and retailers can ship DTC; as of July 1, 2021, only wineries can make DTC shipments into the Silver State. And though it was widely believed retailers could ship directly to consumers in Idaho as long as their home state allowed Idaho retailers to do the same, Idaho recently made clear it has no such reciprocal arrangements; retailers cannot ship to Idaho consumers.


With the battle lines drawn, breweries, distilleries, and retailers will push for advancements in this area in 2022. Distilleries are on the front lines. Jeff Carroll, general manager of beverage alcohol at Avalara, believes retailers, breweries, and distilleries will all make a push to add more states to the mix next year. “But the spirits industry seems especially prepared to make substantive progress in 2022.”

NEXT BIG PHASE OF DTC COULD BE SPIRITS ...

This could be the right moment: When Kentucky authorized DTC shipments for wineries in 2020, it also opened the DTC market to Kentucky breweries and distilleries; several states temporarily authorized direct shipments of spirits during COVID-19 lockdowns, and Colorado, Connecticut, Maryland, and Virginia still allow them. There’s also support in California for Senate Bill 620, which would grant direct shipper permits to distilleries and beer manufacturers.

According to Chris Swonger, president of the Distilled Spirits Council of the United States (DISCUS), “There is great consumer demand for DTC shipping.” DISCUS has joined forces with the American Craft Spirits Association (ACSA) and the American Distilling Institute (ADI) to “persuade the U.S. government to pass DTC shipping laws.” They believe doing so is imperative to the “continued growth of the craft distilling movement in the U.S.”

Beer manufacturers seem less likely to make an aggressive push for DTC shipping privileges; though the Brewers Association publicly supports changing DTC laws, Beer Institute hasn’t declared the same. DTC shipping holds greater appeal for higher-priced items than the average can or bottle of beer. Jeff Carroll predicts it will take at least 15 years for breweries to gain access to the number of states currently open to wineries. Yet he encourages breweries to help move the needle by building out the market in their home states with subscription programs, ecommerce sites, and onsite shipments from tasting or tap rooms.

… AND SPARKS ARE ALREADY FLYING

Though there’s a push for more DTC sales of beer and spirits, growing DTC shipping privileges won’t be easy. As spirits trade groups work together toward expanding DTC shipping, opposition to all DTC beverage alcohol shipments — including wine — is mounting.

Some wine wholesalers and their industry partners worry direct shipping “dismantles effective regulatory oversight” because it bypasses the second tier of beverage alcohol’s long-standing three-tier system of checks and balances:

Source: Craftlab

The Supreme Court of the United States has even been asked to weigh in on the DTC issue. In 2021, the Supreme Court allowed a Michigan law banning direct wine shipments from out-of-state retailers to stand, although in-state retailers can ship directly. And in October 2021, the court decided not to hear a challenge to a Missouri law banning DTC alcohol sales from out-of-state retailers

We anticipate more clashes over the future of DTC shipping in the months ahead.

Where DTC shipping is allowed, compulsory licensing, product registration, and state-by-state shifts to jurisdictional tax systems will increase operational stress on businesses interested in expanding their DTC footprint, particularly smaller producers. Economic nexus laws requiring out-of-state sellers to register then collect and remit sales tax, and marketplace facilitator laws that pass those obligations on to marketplace providers, will be additional stressors. 

Altogether, the complexity of complying with beverage alcohol tax and sales tax requirements could be a major hurdle to business expansion in 2022.

Putting the cap on the last capacity caps

Another issue that could get some attention in 2022 is capacity caps. With Ohio having eliminated capacity caps on direct-to-consumer sales, New Jersey is the only state in the nation that still has them.

As the name suggests, a “capacity cap” caps capacity. In the beverage alcohol industry, the cap is one threshold for who can get a license and who cannot. A producer can’t get a license if it’s over the cap, so any wineries producing more than 106,000 cases of wine per year cannot get a license to ship DTC in New Jersey. 

By limiting who can ship into the state, the capacity cap also takes a bite out of New Jersey’s tax revenue potential. Little wonder the Garden State is under increasing pressure to eliminate its capacity cap for wineries. 

While capacity caps currently affect just one state, all states are grappling with how to regulate delivery apps and third-party providers.

The growth of delivery apps and marketplaces

Alcohol delivery isn’t limited to restaurants and bars. In parts of the country, consumers can have beer, wine, and spirits delivered from retailers such as convenience, grocery, and liquor stores, sometimes within an hour. As of September 2021, DoorDash offers 30,000 different beverage alcohol products in the U.S., Canada, and Australia. Drizly (which was acquired by Uber in October 2021), Instacart, and a growing number of other companies offer similar services. We may never need to leave home again.

For the most part, states have yet to fully digest the impact on-demand delivery apps and marketplaces (often referred to as third-party providers, or TPPs) have on alcohol regulatory and compliance issues. Regulators will need to continue confronting this rapidly evolving ecommerce environment in 2022.

THREE TIERS AND A TPP

A key challenge for regulators will be figuring out how to fit unlicensed TPPs into beverage alcohol’s three-tiered system. They’ll also need to determine how these business models intersect with marketplace facilitator laws.

Currently, some businesses that solicit sales and deliver alcohol to consumers on behalf of licensed retailers are licensed entities. However, if a license isn’t required by law, some may be unlicensed. 

In most jurisdictions, the licensed seller (e.g., the wine shop or liquor store) must maintain control over all aspects of the sale, including 100% of the funds. Yet this is at odds with most state marketplace facilitator laws, which require marketplace facilitators to remit all applicable taxes to the appropriate taxing authority.

The California Department of Alcoholic Beverage Control has admitted that, “on its face,” the state’s marketplace facilitator law “appears to conflict with the Department’s position that only the licensee may be the ‘seller’ of the alcoholic beverages.” It “intends to make further inquiries” into the relationship between licensees and non-licensees, but for now, “licensees must receive all funds from the sale of alcoholic beverages and control all aspects of the financial relationship between them and any third parties acting on their behalf.” However, a registered marketplace may keep the sales tax and remit it as required by law.

Having the marketplace responsible for sales tax but the licensee responsible for excise tax can complicate reporting for all involved parties. Many states haven’t specified how the flow of funds should be handled, and those that have don’t all have the same requirements.

Source: Avalara Tax Desk

Ensuring alcohol isn’t delivered to minors is another key issue that will need to be addressed in 2022. Though delivery apps and TPPs deliver the alcohol, the licensee is responsible for verifying the legal drinking age of the consumer. Of course, the licensee faces challenges in doing so when they entrust a third party to make the physical delivery.

California has decided the licensee is responsible for keeping alcohol out of the hands of minors, even if alcohol is delivered by a TPP. That means the licensee is subject to discipline (e.g., fines, license suspension, or criminal prosecution) if a TPP delivers alcohol to a minor. Other states may reach different conclusions.

Another factor complicating regulation and compliance is the differing nature of the various TPP business models. For example, some companies merely facilitate orders for small retailers (e.g., convenience stores and package stores), who make the sale and deliver the alcohol in their own vehicles. Others make the delivery on behalf of the retailer after facilitating the order. Some use common carriers to facilitate DTC shipments for wine retailers, while others are the actual licensees that own the inventory they sell — though they may seem like a TPP or marketplace to consumers.

Jeff Carroll believes additional regulation of TPPs is likely. “Marketplaces and delivery apps will continue the explosive growth we saw in 2020 and 2021, and alcohol agencies will continue to wrap their arms around the regulation and enforcement of these third parties. We’ll keep a close eye on whether jurisdictions choose to license and regulate these entities or whether they will take a lighter touch and focus solely on preventing underage delivery.”

To date, delivery apps and alcohol marketplaces have primarily acted as a facilitator rather than the retailer. But both business models are rapidly evolving in response to new opportunities and customer demand. In 2022 and beyond, states will look to step up their regulatory efforts to ensure all requirements are met.

Figuring out fulfillment houses

Another issue that will likely come to a head in 2022 pertains to fulfillment houses. Though use of licensed fulfillment houses is widespread in the beverage alcohol industry, they’re becoming a hot topic in state legislatures. 

Licensed fulfillment houses facilitate direct-to-consumer sales for thousands of wineries, many of which lack the space and resources to store and ship the wine they produce. Wineries contract with fulfillment houses to store wine, prepare it for shipment, and pass it to common carriers for distribution to consumers throughout the country. These fulfillment houses can perform the same tasks for breweries, distilleries, even retailers. 

Although critical for moving alcohol from producer to consumer, fulfillment houses aren’t considered the retailer of the alcohol they store and distribute so they’re not responsible for collecting and remitting the taxes due on those sales. That’s a job for the actual retailer (i.e., the producer or retailer).

The role of fulfillment houses is often misunderstood, as can happen with entities working behind the scenes. This puts them at risk of being shut out of the beverage alcohol industry, which would be catastrophic for producers reliant on them: Fulfillment houses have a hand in roughly 60% of shipments of wine in Tennessee, for example.

Indeed, Tennessee came close to banning the use of fulfillment houses in early 2021. Yet after discovering how banning fulfillment houses would actually affect the wine industry, Representative William Lamberth removed that language from the bill. Clarifying the role licensed fulfillment houses play could help prevent such close calls in the future. So could regulating them.

Source: AlabamaKansasKentuckyOhio, and Tennessee.

Will states cut off cocktails to go?

Even though many of the strictest restrictions triggered by the COVID-19 pandemic ended with the first wave in 2020, restaurants, bars, breweries, distilleries, and wineries in much of the country were unable to operate at full capacity well into 2021. Sympathetic to their struggles, numerous state and local governments authorized delivery and takeout sales of alcohol, including cocktails and single servings of beer, wine, and spirits. Consumers embraced these new options with gusto.

Limitations on in-person dining and the fact that many states now permit delivery apps and TPPs to deliver beer with burgers and margaritas with Mexican food caused use of food delivery services in the U.S. to more than double during the pandemic. Furthermore, food delivery has become a $150+ billion industry worldwide — triple what it was in 2017. 

Relaxed restrictions represent an enormous change for businesses, states, and the country as a whole. And the change was solidified after temporary “cocktail-to-go” policies became permanent in many states, including Florida, Texas, and Wisconsin. Unwilling to go that far, California extended its temporary policy through 2026.

As welcome as this development was to many, other states might not make delivery and takeout sales of alcohol permanent in 2022. There’s increasing pressure from some parts of the beverage alcohol industry to allow these relaxed policies to expire, as New York and Pennsylvania have done. So long as businesses can function at full capacity no matter what future coronavirus variants throw at them, there’ll be less need to upset the long-standing status quo.

Still, states that recently expanded options for bars, breweries, distilleries, restaurants, and wineries are unlikely to walk them back: Once granted, it’s difficult to revoke expanded rights. So our fractured country may experience yet another divide: In these states you can order beer, cocktails, or wine with your takeout, in those states you can’t.

Other issues that could impact the beverage alcohol industry in 2022

The battle for market share between flavored malt beverages (FMBs) and ready-to-drink cocktails (RTDs) could intensify. The beer industry is watching with growing alarm as the spirits industry pushes for lower federal and state excise tax rates on RTDs. 

The price of aluminum may continue to rise, increasing costs for the beer industry in particular.

The Biden administration’s Executive Order on Promoting Competition in the American Economy may impact the beverage alcohol industry. The Alcohol and Tobacco Tax and Trade Bureau (TTB) has been tasked with updating its trade practice regulations to rescind or revise regulations that “may unnecessarily inhibit competition” and reduce “barriers that impede market access for smaller and independent brewers, winemakers, and distilleries.”

The Supreme Court of the United States didn’t accept a case about a Florida retailer challenging Missouri’s alcohol delivery laws. What will that mean for wine retailers?

Ongoing strained supply chains could lead to increased rationing. In September, the Pennsylvania Liquor Control Board placed purchase limits on certain bottles for “the foreseeable future.” In North Carolina, consumers are simply encountering “out-of-stock” signs.

Supply chain troubles, shifting consumer habits, and innovative business models could lead to new regulations or policies for the beverage alcohol industry in 2022 and beyond. We’ll track these changes, and more, at the Avalara Tax Desk.

Source: NPR

Communications

The communications industry continues to ride waves of change and taxation upheaval as hope for the Federal Universal Service Fund (FUSF) reform surfaces, more communications services go to the cloud, and taxation of streaming services reaches a tipping point.

What the numbers tell us:

Source: Avalara Tax Desk

What's happening with the federal universal service fund?

The Federal Universal Service Fund (FUSF) helps subsidize unrestricted access to broadband, lifeline communications, and other public services for all U.S. citizens. Since its inception, the fund has been financed by telephone company revenues. Phone carriers pass these fees on to customers as part of their interstate and international service bills.

In July 2021, the Biden administration signed an executive order that opened up reclassification (from Title I back to Title II) for internet service providers (ISPs). This action sparked hope for some industry insiders that it may also ignite reform for the FUSF. That hope had been withering with the nomination delay of a fifth Federal Communications Commission (FCC) member; activity in late October may have revived it.

In April 2021, the FUSF contribution rate hit an all-time high of 33.4% — 20 years ago, it was in the single digits. Though the contribution factor dipped slightly to 29.1% for Q4 2021, it’s still dangerously high for sustainability.

Burgeoning broadband needs and a diminishing phone service revenue base have collided to push the fund toward the red. The fund’s only remedy at this point has been to raise its rates.

Then the current administration opened up net neutrality and other communications regulations for discussion in 2021, improving the possibility that authorities would also consider the fund’s imbalanced contribution sources. However, no real change is likely until ISP reclassification transpires … and that is unlikely to happen until the administration nominates a fifth (FCC) member and releases the party deadlock. The commission was sitting with two Republican and two Democrat chairs and an empty tie-breaker seat.

Reports from late October 2021 stated the administration nominated Gigi Sohn — a net neutrality advocate — for one of the open seats and previous commissioner Jessica Rosenworcel as chairwoman. Recon Analytics founder Roger Entner speculated that net neutrality and program improvement for broadband accessibility programs would be top priorities.

Communications services consolidating into the cloud

Cloud-based services are like a smorgasbord of convenience and technology. You no longer need separate wires, towers, and accounts. Businesses can get data, voice, SMS, and videoconferencing all under one big silver cloud — and they’re doing it. Communications platform as a service (CPaaS) global market revenue hit $5.9 billion in 2020, and industry analysts estimate it will top $17.71 billion by 2024.

But where there’s convenience and consolidation, there also looms complexity — tax complexity. Communications tax is developing more gray areas as different forms of services and technologies converge at lightning speed. Businesses add and bundle new services, and their reach expands into new municipalities. All these tax jurisdictions — approximately 60,000 federal, state, and local — hold their own set of complicated taxation parameters and definitions for the multitude of services provided. Local tax directives can change frequently, challenging companies to stay aware and compliant. For example, West Virginia recently altered how it taxes streaming services. The state still exempts digital products from sales and use tax, but now they deem streaming services taxable.

As communications technology and availability continue to morph and evolve, so will their tax complexities.

Is streaming taxation at the tipping point?

Everybody’s doing it: cutting the cable cord. But as more people drop traditional cable services and sign up for streaming, local municipalities feel the cut to their revenue — and many are going after the streaming services for what they’re losing.

Several tax jurisdictions in Texas filed a class-action lawsuit against Hulu and Netflix in 2020. The suit proposed that under the Texas Utilities Code, the two companies must pay 5% of their gross revenues derived from their provision of video service in that municipality as a franchise fee for using the state’s utilities. The two streaming behemoths countered that they don’t hold a state-issued franchise authority certificate, and therefore the code doesn’t apply. The judge sided with Netflix and Hulu.

Other municipalities in states across the U.S. are taking up similar suits, and so far, three cases have met the same fate as the Texas locales. A California court determined that Netflix didn’t qualify as a “video service provider” under California’s Digital Infrastructure and Video Competition Act. Additionally, the judge felt the streaming video company doesn’t use an internet service provider in a way that warrants service fee liability.

Arkansas gave another win to streaming services when a district court ruled that the companies qualified for an exemption for services provided over the internet. A federal court in Reno, Nevada, also shot down a case, barring the city from collecting a 5% tax on streaming services.

So far, the streaming services are prevailing. But how long will their luck last as their customer base continues to expand and tax jurisdictions’ cable coffers shrink? It’s doubtful local municipalities will give up their campaign to recoup revenue. Senior Tax Strategist at Avalara Toby Bargar said, “I suspect jurisdictions will not give up on taxing these services. At least a few will look at modifying or replacing their cable franchise fee ordinances altogether with something that has a more neutral public policy purpose able to withstand scrutiny.”

As of 2020, the global video streaming market share was $50.11 billion. Between 2021 and 2028, it’s anticipated to increase 21% annually.

 

What can we expect in 2022?

TOBACCO and VAPE

The tobacco and vape industry has had more clouds than sunshine lately: The FDA denied hundreds of vape product applications, a new federal tobacco tax proposal may suffocate smaller vape vendors and steer smokers back to cigarettes, and harsh new regulations imposed by the recent PACT Act revision are pushing electronic nicotine delivery systems (ENDS) vendors to automate tax calculations.

 

What the numbers tell us:

The downwind impacts of the pact act

Lawmakers passed the Prevent All Cigarette Trafficking (PACT) Act in 2009 to battle tax evasion and unlicensed sales of tobacco products, mandating interstate shippers to declare all cigarette sales to state tobacco tax authorities.

In December 2020, politicians quietly amended the PACT Act via the COVID-19 relief bill. As a result, the act also covers all electronic nicotine delivery systems (ENDS): electronic cigarettes, hookah pens, and vaping systems. Anyone who profits from advertising, selling, or transporting cigarettes and ENDS must comply with complex registrations, monthly reporting, and payment of all applicable taxes, including excise.

Though the act might curb crime, industry insiders also consider it capable of snuffing out the vaping sector — sending those seeking an arguably “healthier” alternative to cigarettes back to their traditional packs. How? Severely restrictive shipping and compliance requirements.

To comply with federal prohibition, FedEx and UPS no longer deliver ENDS products to private customers as of March and April 2021, respectively. The United States Postal Service (USPS), with limited exceptions, was forbidden to ship cigarettes directly to consumers with the original PACT Act.

Exceptions for ENDS may be granted if a vendor submits an application to the USPS Pricing and Classification Service Center. The catch? The applicant must be in absolute compliance with all state and federal regulations. Part of that compliance requires sellers to register with the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) and with every tobacco tax authority in every state they wish to operate — advertising included.

Tobacco and vaping vendors must also verify every customer’s age and identity, secure a point-of-purchase signature, and store all sales records for at least four years.

None of these parameters are entirely insurmountable, but they are expensive and time-consuming, particularly for smaller vendors who don’t have the resources. Slippery, ever-changing regulations challenge even the most thorough of sellers. And when you consider the repercussions for failing compliance — up to three years of jail time — for some vendors, it might not be worth the risk. An innocent oversight could end in incarceration. John Beaty, general manager of excise at Avalara, believes auditing activity will most likely increase, making noncompliance an even greater risk.

What will these new draconian regulations do to a once-burgeoning industry? If the vaping industry is even partially extinguished, the federal government will have essentially cut their excise tax revenue — and perhaps perpetuated the illicit activity they’ve intended to thwart.

Vendors lighting up automation options for excise compliance

Most people who sell, ship, or advertise ENDS aren’t tax experts. But the recently amended PACT Act nearly requires them to be. In response to its harsh regulations and compliance parameters, many e-cigarette and vaping vendors are looking to automated solutions for help.

Without a uniform process, many (particularly small ecommerce vendors) find that total compliance with tobacco and vape excise tax is a challenging endeavor — one that’s never wholly accomplished as states and local municipalities constantly adjust change parameters and definitions. Sellers need help with the overload, and automated solutions can calculate excise tax and alert users when changes arise.

Vape and tobacco taxes — How they differ but may soon align

A grand chasm for uniformity exists in excise tax policies for vape and tobacco throughout the country. How states calculate and what they calculate can vary widely. A vendor cannot assume Washington state taxes vape and tobacco products the way New York state does. For vape products, some states tax a percentage of the wholesale cost; some tax a percentage of the retail price; others tax per milliliter or whether the item is an open or closed system; a few like to mix it up and levy a combination, like Georgia.

State tobacco excise tax can diverge just as much as tax policies for vape products. Some states levy an excise tax on cigarettes then lump “other tobacco products” together for another rate. Other states, like Georgia again, charge separate rates for all three, even categorizing cigars as “little cigars” and “other cigars.” States can tax tobacco products 10 different ways and combinations thereof: cost price, gross receipts price, invoice price, manufacturer’s list price, manufacturer’s invoice price, manufacturer’s sales price, wholesale price, wholesale cost price, wholesale purchase price, wholesale sales price. Some states differentiate between moist and dry snuff and product units. Many states also impose sales tax on top of the excise tax.

The Biden administration has an idea to make taxes between cigarettes and vape more “even,” but it’s not necessarily beneficial for the industry or its customers. It’s proposing a federal tobacco tax that could more than double current cigarette tax rates in some states. The rates for chewing tobacco would skyrocket 2,034%, pipe tobacco 1,651%, and snuff more than 1,677% — dipping tobacco in Massachusetts would set a buyer back $20. The proposal would also inflict a federal tax on vapor products where currently none exists and align the tax rate with cigarettes.

Many experts speculate that matching vape products’ tax rates with those of cigarettes will do more harm than good, essentially taxing away any motivation smokers might have to switch from cigarettes to vape.

The tax may also invigorate black market activity. (We know how Prohibition worked out for alcohol.) Extreme taxation to the point where the average middle-class person can’t afford a product can work akin to a ban. And there’s the loss of tax revenue for all the products consumers aren’t purchasing.

FDA denied profusion of applications for vape products

The FDA is spending a good deal of time rolling out marketing denial orders (MDOs) for more than 1.1 million electronic nicotine delivery system (ENDS) products, asserting the flavored products don’t meet health standards (that cigarettes apparently do) and the enticing flavors attract teenagers to a greater degree (than regular cigarettes).

This from the FDA Director of Center for Tobacco Products Mitch Zeller: “Companies who want to continue to market their flavored ENDS products must have robust and reliable evidence showing that their products’ potential benefit for adult smokers outweighs the significant known risk to youth. The burden is on the applicant to provide evidence to demonstrate that the marketing of their product meets the statutory standard of ‘appropriate for the protection of the public health.’ If this evidence is lacking or not sufficient, the FDA intends to issue a marketing denial order, which requires the product to be taken off or not introduced to market.”

The FDA mandated a September 9, 2020, deadline for all vape product application submissions. Except for menthol and tobacco, not one flavored vaping product ran the gauntlet. Many of those products have already been manufactured and are in the market. Hundreds of companies were hit with denials, most small to midsize businesses. Three of the largest manufacturers are still waiting on determination.

Many small vape vendors fear they’ll go bankrupt should they comply with the FDA’s regulations. Some merchants are considering a synthetic nicotine replacement that would fall outside of the FDA’s current control. However, that option is expensive and perhaps not completely out of the agency’s reach.

Some consumer advocates and industry insiders fear the FDA is inching toward a total flavor ban. They’re also concerned tobacco smokers will stay with their old, potentially less-healthy habits due to a lack of more appealing alternatives.

Also, should many of the smaller vendors fold due to these denials, a good portion of businesses and employees of an entire new industry could go bankrupt and face unemployment. And there’s the loss of local revenue that will come as well.

What can we expect in 2022?

Energy

Congress passed the massive infrastructure bill in the middle of November 2021 with hopes of fortifying our nation’s roads, internet service access, and power grid, but what else will it usher in? Resurrection of the Superfund is on that list for certain. The nation’s leaders are also continuing to seek solutions for the diminishing Highway Trust Fund.

 

What the numbers tell us:

Source: AccountingToday

Source: AccountingToday

Source: EVAdoption

The 2021 infrastructure bill

More people using the power grids, more vehicles on the roadways, more people fueling their cars, heating their homes, using water systems, airports, public transportation, etc. We need more resources to fortify and expand our infrastructures. But how do we do that? Federal and local governments have been puzzling over this question for decades.

The massive $1.2 trillion spending package is the Biden administration’s answer to our country’s infrastructure woes, passing with a 228-206 final vote in the second week of November 2021.

The bill proposes to fund new and upgraded infrastructure, such as highways, roads, bridges, waterways, ports, mass transit, broadband, power grids, and the “largest investment in passenger rail since the creation of Amtrak.” The price tag also includes promoting the proliferation of electric vehicles (including school buses) and charging ports as well as environmental remediation, particularly for Superfund hazardous waste sites. 

Also buried among its 1,000+ pages are initiatives divergent from infrastructure, such as the broadest expansion of social services since the 1960s and a mandate for manufacturer-installed drunk driving censors (advanced impaired driving technology) in all new passenger vehicles (bill page 403) by 2024.

According to the White House, the bill will create 1.5 million jobs per year for the next 10 years. But others are worried about the package’s cost and negative impact on several industries, particularly small businesses in the coal, oil, and gas sector. According to the Congressional Budget Office (CBO), the bill will add $256 billion to the country’s deficit.

RETURN OF THE SUPERFUND

The Superfund may return ... and it may not be super popular. A hazardous waste excise tax targeting the oil, gas, and chemical industries, the Carter administration enacted the Comprehensive Environmental Response, Compensation, and Liability Act in 1980 to offset the exorbitant costs of remediating contaminated sites. Congress renewed the tax under Reagan but let it lapse in 1995. Now the Biden administration has resurrected the fund to help subsidize spending for the infrastructure bill.

Since the Superfund’s expiration, the EPA has been dipping into Treasury (i.e., taxpayers’ pockets) funds for cleanup. According to John Beaty, general manager for excise at Avalara, 44,000 cleanup sites exist, 1,300 sit on the national priority list.

So, what’s the issue with the return of the Superfund? Opponents of the tax believe that it severely hindered many gas and oil companies and could do so again. Industry leaders think a revival will not only affect legitimate offenders but also hinder the entire industry — partly because the tax will be levied on importing the chemicals, not just their production.

On the tax’s roster are 42 chemicals — 10 are top players for the oil and gas sectors. If reinstated, it would double the rates imposed from 1995, and chemical sales would be hit with a tax rate range between 44 cents and $9.74 per ton.

Source: AccountingToday

Those additional taxes will undoubtedly be imposed on consumers through increased prices for goods and fuel. One of the chemicals with the highest tax, benzene, is used to produce a vast spectrum of products, such as plastics, dyes, spray paint, detergents, and drugs. Potassium hydroxide is another chemical on the list used to make soap, alkaline batteries, fabric, and wart treatments, and to diagnose fungal infections. So, the tax could hit home for consumers.

Superfund resurrection has had support on both sides of the aisle. Let’s see how that support plays out in the coming years. Though the democrats claim plenty of measures exist to pay for it, the CBO score suggests it will dump $350 billion onto the country’s deficit.

FUELING THE HIGHWAY TRUST FUND

Diminished highway traffic in 2020 collided with the increase of high-fuel efficiency cars and elevated electric vehicle (EV) registrations to put a dent in the federal Highway Trust Fund. The fund that supports federal transportation infrastructure expenditures receives roughly 84% of its revenue from the federal motor fuel excise tax. Fewer gasoline-powered vehicles on the roads — whatever the reason — means less gas is being purchased, and less excise tax is collected, and thus the highway fund deflates. And because most states also impose taxes on motor fuels, the drop dings state tax revenues.

The most direct and obvious solution is to raise the tax rate — many states have done this, but the federal government hasn’t since 1993. But a bump in fuel tax rates could knock down business income and payroll tax receipts.

In response, federal and local governments are seeking other resource avenues. One option that’s already gained momentum at the state level is a tax on electric car charging station purchases and usage. As of December 2020, there are 30,451 locations nationwide that host 96,536 public charging ports.

Many supporters see a charging port tax as a natural progression: Why shouldn’t EV owners contribute to the maintenance fund when they use the very same roadways as traditional automobiles owners? As of September 2021, 35 states and the District of Columbia charge some variety of charging station tax, and as of October 2021, 30 states have imposed additional fees for EV registrations.

Source: NCSL

Still, others caution that even though EV registrations shot up 41% in 2020, the charging station tax wouldn’t suffice to fill the tax gap.

Other options being floated around are an excise tax on electricity and a mileage tax. An excise on electricity would tax everyone, even those who don’t drive or commute very little. And a mileage tax bears a host of concerns. Privacy sits at the top of the list as a government-powered GPS tracking system is an obvious method to calculate and record user mileage.

A mileage tax could also present equity issues — lower-income households would feel the most impact. Would a previously affordable long work commute become unaffordable for some? Many families who can’t afford to fly to see relatives or enjoy vacations often opt to take to the road, but a mileage tax may make even a modest getaway out of financial reach.

Oregon and Utah have already established test programs, and at least a dozen other states are eyeing the option.

One workaround to the personal privacy concern lawmakers are considering is a mileage tax for commercial vehicles only. This modification would bypass many concerns and implementation obstacles.

Regardless of the solutions, there seems to be little doubt that if the federal Highway Trust Fund remains on its current trajectory, the fund would be $189 billion in the red by 2030.

What can we expect in 2022?

Looking ahead

Though the pandemic has forced us to physically distance, it’s also revealed how interdependent we are. More than ever, what transpires on one side of the world affects what happens on the other: A closed factory in Vietnam leads to a logjam at ports in Los Angeles; successful tax policies in Brazil influence tax policy in Italy. And so on.

This report aims to help businesses striving to succeed in this interconnected environment stay nimble and well informed. While we can’t explore everything, we’ve captured the major changes likely to shape business and tax compliance in 2022. If you want more, check out our other resources:

Or give us a call at 877-352-4646. Automating tax compliance helps businesses track and comply with ever-changing tax laws around the world.


Avalara Tax Changes 2022

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