Avalara Tax Changes 2023

Sales tax changes

Avalara Tax Changes 2023

Sales Tax Changes

U.S. sales tax changes

Sales tax affects everyday interactions like online sales via ecommerce, as well as more esoteric dealings such as transactions occurring in the metaverse. Get comfortable and ready to learn from this meaty sales tax section.

Digital tokens: Cryptocurrency and NFTs enter the mainstream


SOURCE: Alioth

SOURCE: Nansen

It’s getting harder for state legislatures and departments of revenue to ignore bitcoin, blockchain, cryptocurrency, digital currency, and NFTs. 

Lawmakers in approximately 37 states introduced a wide range of legislation related to cryptocurrency in 2022. Proposals included Arizona SB 1493, to allow government agencies to pay public employees’ salaries in virtual currency upon request; Missouri HB 2672, to exempt virtual currencies from taxation; Oklahoma SB 590, to provide a sales tax exemption for equipment and machinery used in digital asset mining; and Wyoming SF 56, to allow lottery tickets to be purchased with virtual currency. 

None of those bills gained much traction, but several bills did become law. These include:

  • Hawaii SB 2695, to create a blockchain and cryptocurrency task force

  • Missouri HB 1472, to include blockchain technology in money laundering offenses

  • Tennessee SB 535, to prohibit local government entities from dealing in blockchain, cryptocurrency, or NFTs without written approval from the state treasurer

  • Utah SB 182, to establish a framework for the regulation of digital assets

  • Virginia HB 263, to permit banks in Virginia to provide virtual currency custody services

“All but one of the enacted bills on this list regulate or restrict crypto,” observes Scott Peterson, VP of Government Relations at Avalara. “Is that the direction states will go? Looks like it could be a pattern.”


Senior Director of North America Tax Content at Avalara David Lingerfelt believes states won’t be able to ignore cryptocurrency as a form of payment for long because sooner or later the reality of the crypto economy will impose itself on states.

“In the short term, there are barriers to cryptocurrency adoption,” Lingerfelt explains. Today, the IRS categorizes cryptocurrency as property and taxpayers incur an income tax loss or gain when they use cryptocurrency as payment for taxes. Eventually, states will have to build processes to convert cryptocurrency to fiat currency, plan for the costs of conversion, and determine how to absorb the costs or pass them on to taxpayers.

Lingerfelt says states moved to digital ACH debit and credit card payments and away from paper checks because they’re faster and cost less to process. “Ultimately, for the same reasons, states will adopt cryptocurrency. State adoption will accelerate when stable coins become mainstream.”

Colorado shows how that can be done.

Paying your taxes with cryptocurrency will cost you

The Colorado Department of Revenue began accepting cryptocurrency for all state tax payments starting September 1, 2022. 

Colorado will charge taxpayers an extra service fee for the privilege of paying their taxes in cryptocurrency: $1.00 plus 1.83% of the payment amount. That’s not all. An additional fee applies when taxpayers purchase cryptocurrency on PayPal (the only cryptocurrency wallet accepted by the state), while taxpayers who transfer cryptocurrency from an external wallet to their PayPal Cryptocurrencies Hub are subject to applicable miner/gas fees.

It’ll be interesting to see where this all goes, if anywhere, given the volatility of the cryptocurrency market in November 2022. Ohio began accepting cryptocurrency tax payments back in November 2018, but stopped less than a year later. If the experiment proves successful in Colorado, other states may follow suit. Arizona, California, and New York have already shown interest.

On the other hand, in November 2022, New York Governor Kathy Hochul approved a moratorium on certain cryptocurrency mining operations due to their potential impact on climate change.

SOURCE: Avalara

NFTs may be subject to sales tax

A cryptocurrency like bitcoin is a type of digital token that’s fungible, meaning it can be exchanged or replaced by something else of equal value. Of course, values can fluctuate wildly: One bitcoin was worth 9 cents in July 2010 and more than $60,000 in October 2021. 

An NFT is a non-fungible token that’s unique, cannot be replicated, and is recorded in a blockchain to certify authenticity and ownership. NFTs have been around since 2014 but didn’t become a household name (or get closer to becoming one) until 2021, when Beeple’s Everydays sold for $69.3 million and Pak’s The Merge sold for $91.8 million.  

With that kind of money changing hands, or crypto wallets, it was only a matter of time before states got serious about taxing NFTs

In February 2022, the Treasury Department of Puerto Rico proposed treating NFTs as a taxable digital product. In May 2022, the Pennsylvania Department of Revenue added NFTs to its list of digital products subject to sales tax. And on July 1, 2022, the Washington State Department of Revenue issued detailed interim guidance on the taxability of transactions involving NFTs; there’s a lot to unpack, but the takeaway is that Washington state generally considers NFTs to be subject to sales tax. 

Not all NFTs command millions of dollars, but the fact that some do will likely turn more tax officials’ heads. Minnesota and Wisconsin have determined that NFTs are subject to sales tax when the underlying goods and services are taxable. Additional states will probably decide to tax NFTs in 2023 and beyond. As they do, they’ll need to sort out issues like which taxing authority has jurisdiction over NFT transactions, whether gas fees should be subject to tax, and so forth. (Per The Motley Fool, NFT gas fees refer to “the money paid to blockchain miners for processing the transaction that is embedded in the blockchain.”)

Because NFTs are new and complex, states will need to figure out how NFT transactions work before they can decide whether to tax or exempt them. As Washington explains in its interim guidance, “In order to determine the proper tax treatment of a given transaction involving an NFT, it is critical to consider: a) whether the transaction is comprised of multiple components or merely a digital code which grants the owner access to a digital good, b) the taxability of each underlying component, and c) the identity of the parties to the transaction.”

Scott Peterson reminds that there’s likely to be additional complexity in Colorado and other home-rule states. Local governments in Colorado, like Boulder, have the authority to tax sales that aren’t subject to the state sales tax, or to exempt transactions that are.

Some folks may roll their eyes at cryptocurrencies and NFTs, but for entities interested in doing business in the metaverse, cryptocurrency and NFTs may be indispensable.

SOURCES: NFT Now and The Motley Fool

SOURCE: Investopedia

The metaverse unlocks a world of tax issues

SOURCE: McKinsey

SOURCE: McKinsey

SOURCE: McKinsey

SOURCE: GlobeNewswire

There’s a lot more to the metaverse than concerts, fashion shows, flashy skins, and virtual property bubbles. 

City planners in Boston use digital twins for development and planning purposes, and digital identities help unhoused people in Austin access healthcare. Federal and state agencies use artificial intelligence (AI) and metaverse technologies to simulate and study wildfires to mitigate their damage. NASA uses the metaverse to simulate life on Mars.

Everyone will likely be using the metaverse in some form or another within five years, predicts EY Global Leader Blockchain Tax Services Dennis Post. Activities could include entertainment and virtual travel, but also remote work and virtual healthcare visits. So governments will need to determine how their tax laws apply to transactions occurring in and through the metaverse and Web3 — the next iteration of the internet. 

The new technology is “already triggering myriad taxable events,” according to EY, and there are many questions in need of answers. To name just two:

  1. Which taxing authority has jurisdiction over transactions occurring in virtual worlds? 

  2. Do tax events like sales tax holidays transfer to the metaverse?

States will need to define new technologies, for tax purposes, and decide how to tax bundled transactions. Where allowed, differences between state and local tax policies will need to be addressed. There’s a lot to do.


David Lingerfelt believes tax issues related to the metaverse, cryptocurrency, and NFTs will be the next Wayfair event in indirect tax, referring to the 2018 decision by the U.S. Supreme Court that allowed states to tax online sales. He draws this comparison because of the rapid pace of change, the confusion over how to tax these transactions, and the looming tide of cases that will challenge the taxation of NFTs and metaverse transactions. 

“Web3 is ushering in a rapid economic transformation that will be powered by blockchains and avatars, and there’s a lack of clarity and uniformity on how to tax these transactions,” Lingerfelt explains. “This is likely to generate numerous tax controversies as jurisdictions struggle to modify their statutes and guidance to keep pace with this evolving technology.”

Meanwhile, some states are still struggling to smooth out online sales tax issues stemming from Wayfair.


Online sales tax: Wayfair comes full circle

SOURCE: Avalara

SOURCE: Avalara

The U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. was both simple and significant. 

Before the Wayfair decision in 2018, states could generally require a business to collect sales tax only if the business had a physical connection to the state. The ruling allowed states to tax businesses with no physical presence in the state (remote businesses), in addition to in-state businesses.


By January 1, 2020, nearly every state with a general sales tax had an economic nexus law requiring remote retailers to register for and collect sales tax if their sales in the state exceed a certain threshold. Nexus is the connection that allows a state to tax a business. Economic nexus is the kind of connection that’s economic, like having $100,000 in sales in the state during the previous calendar year.


Florida and Missouri were the last two states to adopt economic nexus laws, for different reasons. Florida’s governor at the time was opposed to taxing remote sales. Missouri lawmakers were stymied by the complexity of the state’s sales tax system. 

The Sunshine State adopted economic nexus in April 2021 and began requiring remote sellers to collect and remit sales tax on July 1, 2021. True to form, Florida didn’t give businesses much time to prepare. 

Missouri took the opposite approach.

SOURCE: Avalara

Economic nexus in Missouri. It’s been a long time coming.

On June 30, 2021, the governor of Missouri signed an economic nexus bill requiring the state to tax remote sales effective January 1, 2023. It seems the Missouri Department of Revenue needed every bit of that time to simplify its complex sales and use tax system, which includes more than 2,000 overlapping tax jurisdictions.

The complexity of Missouri’s sales and use tax system is a real issue. In the Wayfair decision, the Supreme Court noted that “South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce,” and that the state participates in the Streamlined Sales and Use Tax Agreement (SSUTA or SST). 

The SST program reduces the burden and cost of sales and use tax compliance for remote businesses by requiring member states to have:

  • A central, electronic registration system
  • Consumer privacy protection
  • Simplified administration of exemptions
  • Simplified state and local tax rates, remittances, and returns
  • State administration of sales and use tax collections
  • Uniform state and local tax bases, definitions, rules, and sourcing

On top of that, the 24 SST member states will pay for software and services provided by a certified service provider (CSP) to qualifying remote businesses. Pennsylvania, which is not a member of SST, provides a similar program.

The Supreme Court didn’t mandate membership in SST, but most states got the message: If you want to tax remote sales, you’d better do what you can to make sales tax compliance less onerous. 

Missouri’s been working on it, though the full extent of its simplification measures won’t be known until the Department of Revenue publishes guidance and requirements for remote sellers. The department will also address the state’s new marketplace facilitator law, which takes effect January 1, 2023, as well.

Morphing requirements for marketplace facilitators and sellers

As Missouri prepares to require marketplace facilitators to collect and remit sales tax on behalf of third-party sellers, other states are elbow-deep in clarifying and updating existing laws. “While there is very little question whether someone is a seller,” says Scott Peterson, “it can be difficult to know if what you do qualifies as a marketplace.”

Marketplace transactions account for approximately 67% of global ecommerce, and sales by third-party sellers are growing at the fastest pace. Marketplace laws affect both facilitators (e.g., Amazon, eBay) and the third-party businesses that sell through the platforms, yet in May 2022, a survey of hundreds of U.S.-based businesses found that many businesses of varying sizes weren’t sure they were doing what’s necessary to comply with marketplace facilitator laws. In fact, confidence was lower than it had been at any point during the six waves of the survey (December 2019 through May 2022).  

Small businesses may not be sure what marketplace laws require of them, notes Liz Armbruester, EVP of Customer and Compliance Operations at Avalara. “The requirements have changed frequently, and the calculation and reporting of tax due is often different when selling on a marketplace versus their own ecommerce site. It’s a lot to manage for a small business.” 

Large businesses surveyed in May 2022 were more aware of the impact of marketplace facilitator laws than the large businesses that were surveyed in previous waves. That could be because large businesses are more likely than small businesses to have tax experts advising them on their responsibilities. Large businesses may also be more likely than small businesses to be marketplace operators themselves.

SOURCE: Avalara

Does marketplace inventory create nexus?

One issue facing marketplace sellers is whether marketplace inventory establishes physical presence nexus for them. Several states have held marketplace sellers liable for past sales tax because of inventory in the state. Marketplace sellers are fighting the assessments, and in September 2022, a Pennsylvania court determined that having inventory placed in Fulfillment by Amazon (FBA) warehouses does not, in and of itself, create a sales tax obligation for nonresident FBA sellers. The following month, a spokesperson from the Pennsylvania Department of Revenue said it wouldn’t appeal the decision because the case lacked “broader applicability.”

Still, we’ll likely see more developments on this front in 2023. More than 20 states specify that having marketplace inventory in the state creates physical presence nexus for third-party sellers. California, Washington, and Wisconsin are holding FBA sellers liable for past sales tax based on their marketplace inventory. The executive director of the Online Merchants Guild, which brought the case against Pennsylvania, expects it will take a long time to resolve this issue.

Tax requirements for marketplaces are in flux

Meanwhile, marketplace facilitators must continually respond to changing requirements as states amend and clarify their marketplace facilitator laws and rules. Recent updates include:

  • Colorado and Oklahoma require online marketplaces to collect and report information on high-volume sellers starting January 1, 2023; other states are looking to do the same
  • Tennessee determined certain marketplace facilitator fees are not subject to sales tax
  • Oklahoma is requiring marketplace facilitators to collect and remit applicable local taxes as of January 1, 2023

Many states are also scrutinizing requirements for food delivery marketplaces, car-sharing platforms, and marketplaces serving the lodging industry. See the lodging tax section for more details.

There’s additional complexity for marketplaces doing business outside of the U.S. For example, as of July 1, 2022, British Columbia requires marketplace facilitators to collect and remit Provincial Sales Tax (PST) on certain online marketplace services. See the global tax section for more details.

SOURCE: Avalara

Local tax conundrums: There’s a lot to sort out

SOURCE: Avalara

SOURCE: Avalara

SOURCE: Avalara

SOURCE: Avalara

SOURCE: Avalara

Whether, and to what extent, businesses should be responsible for collecting and remitting local sales and use taxes is a hot topic among state and local governments in several states.

Taking the home out of home rule

In most states, the state tax department administers state and local sales and use taxes. In home-rule states like Alabama, Alaska, Colorado, and Louisiana, many local governments levy and administer their own local sales and use taxes. 

This may not be overly burdensome for brick-and-mortar businesses with an obligation to collect and remit sales tax in only one jurisdiction, even though they’d need to register with and remit returns to both the state and local taxing authorities.

However, for businesses required to collect and remit in multiple jurisdictions within a home-rule state (and likely also in multiple states), local registration, collection, and reporting requirements are a bear. 

Understanding this, home-rule states are doing their best to simplify local sales and use tax compliance for remote sellers. It’s not easy, and efforts to streamline sales tax compliance are progressing at different paces with different results.


Alabama offers a single rate to remote sellers

Alabama allows and encourages remote sellers to apply to collect, remit, and report a Simplified Sellers Use Tax (SSUT) on all sales into the state, rather than collect, remit, and report at the combined rate actually in effect at each location. “From a burden reduction perspective, it would be hard to conceive of a simpler system,” notes the State Tax Research Institute.

Yet although the Alabama Department of Revenue administers sales tax for many local taxing authorities, some local governments administer local taxes themselves. As a result, some businesses, including those with a physical presence in the state, could be required to register with and remit to multiple taxing authorities. In other words, some compliance complexity remains.

SOURCE: Avalara

Alaska creates single points of remittance for local sales and use taxes

Alaska has no state sales tax, but more than 100 city or borough governments levy local sales and use taxes. 

After the Wayfair ruling, the local governments created the Alaska Remote Seller Sales Tax Commission to serve as a “simplified, single-level statewide administration” for participating communities that enforce economic nexus. The commission is operated by the Alaska Municipal League.

Colorado municipalities urge solidarity with the state

Retailers required to collect Colorado state sales tax are also required to collect applicable state-administered local taxes. The Colorado Department of Revenue administers sales tax for many cities, most counties, and some special districts in the state. However, it doesn’t handle sales and use tax for close to 70 self-administered jurisdictions, some of which may require remote sellers to collect and remit local sales and use taxes.

“It’s often the case when local governments have a sales tax that retailers have to keep track of lots of local rates,” explains Scott Peterson. “In a few states retailers also must keep track of tax base differences between local jurisdictions and the state, but only in a very few states are retailers required to have a separate license per local government. The Colorado Legislature may not be able to change the rate and taxability differences, but they can and have eliminated the separate license requirement.”

Home-rule jurisdictions are prohibited from charging remote sellers a fee for local business licenses as of July 1, 2022, under Senate Bill 32. Effective July 1, 2023, self-administered local governments are prohibited from requiring remote businesses and sellers with “only incidental physical presence in those local taxing jurisdictions” to obtain a local license altogether. Until then, self-administered home-rule governments can require remote businesses to register to do business, collect applicable local taxes, and file returns.

The Colorado Municipal League (CML) encourages self-administering home-rule districts to either not tax remote sales or to adopt its model ordinance on economic nexus and join the state’s new single point of remittance portal (SUTS). It believes enforcing economic nexus at the local level without the single point of remittance would be unconstitutionally burdensome

Many home-rule municipalities have adopted the CML ordinance and use the SUTS portal, but some, including Grand Junction, have not. Furthermore, self-administering jurisdictions still determine the tax rate, base, and exemptions, and Colorado localities can audit all vendors.

Louisiana works to simplify compliance for in-state sellers

Recognizing the unnerving complexity of Louisiana’s sales and use tax system, the Louisiana Legislature created the Louisiana Sales and Use Tax Commission for Remote Sellers to simplify sales and use tax compliance for remote sellers. And indeed, the commission has streamlined sales and use tax compliance for businesses with no physical presence in the state. 

Yet businesses with a physical presence in Louisiana that sell and deliver to locations throughout the state are responsible for collecting and remitting local taxes to the parish where the sales were made. As there are 64 parishes in Louisiana, a business could potentially be required to register with and remit to 64 different local tax departments in addition to being obligated to file and remit state sales tax with the Louisiana Department of Revenue.

Lawmakers in the state are interested in creating a single commission for in-state businesses, as they’ve done for out-of-state businesses. In 2021, Louisianans voted against the creation of a streamlined sales and use tax commission, but the State Tax Research Institute expects the state to keep trying.

Texas: Don’t mess with local sales tax revenue

There’s an altogether different sort of a situation in Texas, which is not a home-rule state. It involves the allocation of local sales tax revenue.

Before Texas started taxing remote sales, Round Rock and several other cities in the state made quid pro quo deals with certain companies: If the companies set up shop in the city, creating jobs, etc., the city would kick back a portion of the sales tax revenue they generated. Win-win. 

The Round Rock deal and others like it worked because Texas sourced orders to the location where the order was received (origin sourcing), not the delivery address (destination sourcing). 

After Texas started taxing remote sales, the Texas Comptroller realized cities not party to such deals — the majority of Texas cities — are “losing revenue they need to provide services to the taxpayers who actually made the purchases.” Comptroller Glenn Hegar explained most taxpayers expect local sales taxes to fund local services, like fixing potholes. Instead, local taxes are “shipped off to another community to fix their potholes.”

So the Texas Comptroller updated the sourcing rules to clarify that sales tax is sourced either to the location where an internet order is fulfilled or to the delivery address, rather than to the location where the order was taken. This helps ensure the people who pay the sales tax will, for the most part, benefit from that sales tax revenue.

It also jeopardizes the sales tax collections of Round Rock and cities in similar situations. Round Rock alone stands to lose as much as $30 million in annual revenue because of the policy change. So Round Rock and the other cities are suing the state.

The battle over sourcing Texas sales tax continues. One of the local tax sourcing changes scheduled to take effect October 1, 2021, was delayed due to the lawsuit. And in August 2022, the 250th District Court ruled the state failed to comply with certain procedural requirements and remanded the case to the Texas Comptroller for revision or readoption. 

Texas certainly isn’t the only state where local taxing districts and companies engage in sales tax sharing agreements. California lawmakers tried to put the kibosh on such deals in 2019, but the governor vetoed the bill.

“In 1999, nationally elected officials directed states to examine why sales tax was so complicated and to recommend solutions to that complexity,” explains Scott Peterson. “Local taxes, and especially locally administered taxes, were number one on the list of complexities. After all these years, some of the complex local tax issues are being resolved.”

SOURCE: Avalara

Taxability changes: Tax on, tax off

SOURCE: Avalara

SOURCE: Avalara

SOURCE: Avalara/Potentiate survey

SOURCE: Avalara/Potentiate survey

SOURCE: Avalara/Potentiate survey

SOURCE: Avalara/Potentiate survey

As always, states made numerous changes to their taxability laws in 2022. With pockets generally full, many states established new permanent or temporary exemptions.

Tax off

New exemptions and reduced rates

Diapers, feminine hygiene products, and food top the list of items for proposed sales and use tax exemptions most years. That stood true in 2022.

States that decided to permanently exempt or reduce the sales tax on diapers, menstrual care products, and/or food include:

  • Colorado: Diapers and feminine hygiene products exempt as of January 1, 2023
  • Indiana: Diapers exempt as of September 1, 2022
  • Iowa: Diapers and feminine hygiene products exempt as of January 1, 2023
  • Kansas: Tax on food and food ingredients gradually drops starting January 1, 2023, until fully exempt effective January 1, 2025
  • Louisiana: Diapers and feminine hygiene products exempt as of July 1, 2022
  • Maryland: Diapers, baby bottles, breast pumps, and more exempt as of July 1, 2022
  • New York: Diapers, already exempt from state sales tax, exempt from local sales tax effective December 1, 2022
  • Virginia: Sales and use tax rate on food and personal hygiene items (including diapers) drops from 2.5% to 1% effective January 1, 2023

Ohio, Oklahoma, Michigan, Washington, and several other states and municipalities also considered exempting diapers, feminine hygiene products, and/or groceries. With inflation making it harder for low-income families to make ends meet, such exemptions may get more traction during 2023 legislative sessions.

New sales tax holidays and other temporary exemptions

Temporary exemptions, also called sales tax holidays or tax-free weekends, were also quite popular in 2022. 

States with new or extended sales tax holidays include:

  • Connecticut: Gas tax holiday April through June 2022
  • Florida: Nine overlapping sales tax holidays or temporary exemptions plus a motor fuel tax exemption enacted in 2022; some extend into 2023 and 2024
  • Georgia: Gas tax holiday March 18 through December 11, 2022
  • Illinois: Sales and use tax on groceries suspended from July 1, 2022, through June 30, 2023
  • Maryland: Gas tax holiday March 18 through April 16, 2022
  • New Jersey: Back-to-school sales tax holiday August 27 through September 5, 2022
  • New York: Gas tax holiday June 1 through December 31, 2022
  • Tennessee: Food and food ingredients exempt from August 1 through August 31, 2022
  • Ketchikan Gateway Borough, Alaska: A one-day sales tax holiday for local sales tax October 1, 2022

In other exemption news: 

California is providing a sales and use tax exemption for qualified electric and hybrid vehicles between January 1, 2023, and January 1, 2028; the exemption is part of the Clean Cars 4 All program, which was created to increase use of zero-emission and hybrid vehicles in low-income and disadvantaged communities. 

Maryland clarified that certain digital products are exempt from sales tax as of July 1, 2022 (after broadening tax to certain digital products in 2021).

New York extended its exemption for certain candy, fruit drinks, soft drinks, and bottled water sold from vending machines. Originally set to expire in 2022, the exemption will now last through May 31, 2023.

SOURCE: Avalara

Tax on

There wasn’t much talk of expanding state sales tax bases in 2022, perhaps due to generally strong fiscal health and ongoing uncertainty related to the COVID-19 pandemic. However, some states are broadening sales tax, and others are exploring the idea.

One of the most startling sales tax events took effect in Colorado on July 1, 2022. OK, the Colorado Retail Delivery Fee is technically a fee, not a tax, but it looks and acts like a tax. The 27-cent fee applies to taxable sales delivered by motor vehicle in the state. It’s not subject to state sales tax but is subject to local sales tax in some home-rule jurisdictions. Here’s what you need to know.

Kentucky sales tax applies to approximately 35 new services starting January 1, 2023. Some of the newly taxable services could be categorized as essential, such as certain labor and repair services, household moving services, and website hosting services. Others may be considered nonessential, including body modification services and certain cosmetic surgery services.

Nebraska lawmakers introduced a measure to impose sales tax on “every person engaged in the business of providing any service,” with the exception of services rendered by an employee to their employer. It didn’t get far. 

Kansas considered taxing digital property and subscription services, but the measure died.

As previously noted, Pennsylvania, Puerto Rico, and Washington have all clarified (or are working to clarify) that sales tax applies to non-fungible tokens (NFTs). As the Institute on Taxation and Economic Policy notes, this will be “interesting and challenging for tax administrators.”

SOURCE: Avalara

Other issues likely to affect sales tax compliance in 2023

Marketplace audits

As there’s still a lot of confusion in the retail industry around what makes a marketplace, many businesses aren’t sure whether they’re subject to state marketplace facilitator laws. This issue could come to a head if states increase audit activity in response to a cooling economy and declining tax collections.

Digital services taxes

There was a decisive move in the ongoing battle over Maryland’s controversial digital advertising tax in October 2022. Judge Alison Asti of the Anne Arundel County Circuit Court declared the state’s digital advertising gross revenues tax law unconstitutional.

Maryland Comptroller Peter Franchot is ready to move on. “I firmly believe that instead of continuing to expend public resources to defend a law that was constitutionally questionable at the time of enactment,” he said in a statement, “the incoming governor and the incoming legislature should instead be given the opportunity to revisit this law.” He added that while the law was well-intentioned, “its constitutionality — coupled with the tax’s residual impact on small businesses that utilize digital advertising services” gave him pause. 

Nevertheless, on November 21, 2022, Attorney General Brian Frosh filed a notice to appeal the decision.

Scott Peterson also finds the state’s law to be questionable, noting that it picked winners and losers by limiting the tax only to digital advertising. “State policies may sometimes appear to discriminate against certain business activities, but states have to be able to prove that doing so is a legitimate state interest. Even without bringing in the federal Internet Tax Freedom Act, Maryland struggled to justify treating digital advertising differently from other advertising.“

Peterson adds that states often tax the print side of advertising because it’s tangible and easy to source to a location. “That’s a crucial requirement of a sales tax. Advertising is rarely subject to a transaction tax by the states because the industry is so broad.”

Digital services tax (DST) was first proposed by the European Commission in 2018, and several EU member states now tax digital services. However, the European Commission generally considers DSTs to be a Band-Aid, not a permanent fix. According to a report issued by the State Tax Research Institute, DSTs will eventually be discarded as member states switch to economic nexus and market-based sourcing rules.

SOURCE: Casetext

Digital nomads

There are likely to be more developments related to digital nomads and the remote workforce. Though many people are returning to the office, either voluntarily or as required by employers, many continue to work remotely at least part of the time. Even the IRS is embracing “telework and workplace flexibility.” The agency may launch a pilot program in 2023 to “compare the productivity and efficiency of remote and hybrid IRS employees against peers who have already returned to the office.” If the IRS can do it, surely other businesses can too.

Employees working remotely from other states can establish nexus for their employers, exposing them to income tax, sales tax, and other tax obligations. Having people on the payroll in other countries can create even more complicated tax issues, although some countries are encouraging digital nomads to set up shop by waiving certain tax requirements, at least temporarily.

Real-time compliance

U.S. companies that do business abroad will need to adapt to real-time compliance requirements. “Electronic invoicing and digital reporting is the clear direction of travel for tax authorities within Europe,” says Alex Baulf, senior director of Global Indirect Tax at Avalara. He notes that France will mandate e-invoicing starting July 1, 2024. Though only large businesses will be required to issue electronic invoices on that date, every business will need to be able to receive them. “This is a huge, huge change.”

Meanwhile, some states in the U.S. are actually moving away from real-time compliance. Scott Peterson believes states don’t want to pile more expenses on businesses right now, and transitioning to electronic invoices would be costly. Yet electronic invoices and real-time compliance mandates will likely surface in the U.S. eventually. Since there’s no central taxing authority for sales tax in this country, states, territories, and local governments will need to work out their own standards. “Don’t expect one simple, seamless national solution,” says Liz Armbruester.

SOURCE: Avalara

The Business Payments Coalition ran an e-invoicing pilot program through 2022 and plans to establish an operational B2B invoice exchange framework for the U.S. market in 2023. It will be interesting to watch it unfold.

Discover more tax changes in our industry sections.

Avalara Tax Changes 2023

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