Global sales tax changes over the past year have been accelerating due to COVID-19, supply chain pressures, e-commerce and nexus issues, plus other factors.
Avalara’s 2022 Tax Changes report discusses some of the main domestic sales and use tax changes along with global tax changes challenging cross-border sellers. The report explores many of the tax compliance issues confronting retailers, manufacturers and software businesses. It also gives an overview of the tax changes affecting compliance for businesses in the alcoholic beverage, communications, hospitality, energy, tobacco and vaping sectors.
Many of the changes came in response to the pandemic, which has exposed weaknesses in the global supply chain that have raised prices on common consumer goods, even as there has been increased demand from customers who have been ordering via e-commerce sites. Retailers have been adopting more of an “omnichannel” commerce, or “omnicommerce,” approach to providing goods in brick-and-mortar stores, online and via delivery services.
“COVID has driven this rapid adoption of omnicommerce,” said Liz Armbruester, Avalara’s senior vice president of global compliance. “That has an impact on where and how people sell and exposure to taxes that otherwise maybe they wouldn’t have been exposed to pre 2019. But now, because it’s so easy to get on a marketplace and sell through e-commerce, to ship internationally, all of a sudden you’ve got consumers all over the place. Businesses have to understand and attempt to be compliant in places that they previously wouldn’t have.”
Omnichannel commerce and remote work are likely to cause more tax headaches as they continue growing, though probably not at the rocket speed of the past two years. This year more brands are expected to push hard to reach customers online and in person, and tax liability could expand as new nexus obligations are triggered.
“With every state with a sales tax now having adopted economic nexus, this will lead to added compliance complexity for businesses selling in multiple channels,” said Armbruester.
Many B2B sellers, including manufacturers, have embraced e-commerce during the pandemic, while dealing with the economic nexus complexity created in part by the Supreme Court’s 2018 decision in the case of South Dakota v. Wayfair, which led to more states requiring online merchants to collect sales taxes from their out-of-state customers. Not just online retailers are being affected now.
“Another catch for manufacturers is that tax-exempt sales are subject to economic nexus in some states, like Alabama, where $250,000 in total retail sales of tangible personal property in the state in the previous calendar year, including exempt sales, will trigger nexus,” said Armbruester.
The report also covers the phenomenon of remote work, and tax obligations triggered by employees working exclusively from home while having nexus in another state. “Many states have looked the other way during the pandemic and not enforced normal nexus rules,” said Armbruester. “But states are starting to return to business as usual, or adapting their nexus rules. We’ll see continued state action around remote work tax policies this year.”
Many states are unexpectedly flush with cash despite the pandemic and some may even cut taxes, even as they are doubling down on taxing remote sellers and marketplaces. “The good news will push states to cut back in areas like receipts tax, and in states including North Carolina, phasing out corporate income tax,” said Armbruester. “This makes states more reliant on sales tax, so businesses should be prepared. Marketplaces and remote sellers should be on notice for impacts. The Wayfair laws are on cruise control in most states, delivering steady streams of tax revenue. With increased focus on sales tax in ’22, remote sellers can expect increased enforcement. Ditto marketplaces, which are simply one-stop shops for tax collectors.”
Some states and the federal government would like to see more of a real-time approach to sales tax compliance.
Real-time tax compliance
“When I think about real-time compliance, I split it into the transactional reporting component and then the tax liability remittance piece,” said Armbruester. “It will take technology to be able to do both. There are government agencies today that facilitate some type of reporting of a transaction, either before the actual transaction between buyer and seller happens, ior something that happens near term. All of this is to combat fraud, to make sure the revenue agencies understand what the full transaction history is, and what they expect to receive. But the remittance piece of it isn’t happening until the period ends. However, there are some states out there like Massachusetts that would like to get their hands on the money sooner. That’s where the remittance piece comes in and needs to be closer to the point in time of transaction. But nobody’s really doing that yet.”
Federal authorities are trying to push the existing bounds of real-time compliance. “While the conversation around real-time compliance is still in its infancy in the U.S., 2022 is poised to be a pivotal year in shaping the strategies tax authorities will adopt to make it a reality in the near future,” said Armbruester. “We predict that, while broad-scale digitization of tax compliance is still somewhere in the future, we’ll see some foundational forward progress in that direction in 2022, primarily because tax authorities want the visibility into businesses’ data that comes with digitization.”
Avalara’s 2022 Tax Changes Report also covers many of the highlights of international tax trends to watch this year as global ecommerce has exploded in recent years. “From approximately $1.672 trillion in 2015, global retail ecommerce sales are on track to reach $4.921 trillion in 2021 and could surpass $7 trillion by 2025,” said Armbruester. “New markets and opportunities are opening to businesses at a rapid rate. Yet the enormous volume of cross-border shipments is also straining a supply chain struggling due to factory closures, port backlogs, and labor shortages exacerbated by the ongoing COVID-19 pandemic. All of this adds to the burdens of international sellers already grappling with a raft of complicated cross-border compliance issues, particularly those related to indirect tax.”
The ongoing digitalization of global tax compliance is being driven by countries that want access to underlying sales data. The United Kingdom is dealing with the impact of its exit from the European Union, which has affected the U.K. and E.U. economy, although it’s difficult in some cases to distinguish between the impact tied to Brexit or COVID-19.
“Companies with business dealings in the U.K. are dealing with a tidal wave of legislation post-Brexit that’s left many businesses feeling overwhelmed by the practicalities of selling online and internationally,” said Armbruester. “Internet sellers with customers in numerous countries are sorting through the 2021 U.K. e-commerce package, unrelated to Brexit, and a new streamlined registration process in the EU. For sellers, it’s simply lots of changes and added complexity to comprehend and comply with.”
The new global minimum tax deal struck by over 130 countries, including the U.S., last year will eventually have an impact as well, although the Biden administration is having trouble getting corporate tax increases passed in Congress with Republicans uniformly opposed to the Build Back Better Act, and some moderate Democrats as well.
Nevertheless, 136 countries representing more than 90% of global GDP agreed to a global minimum tax plan proposed by the Organization for Economic Cooperation and Development, subjecting about 100 of the world’s largest and most profitable multinationals to a minimum tax of 15% beginning in 2023, and redistribute more than $125 billion in profits to countries around the globe. “The implications are huge,” said Armbruester.
Some countries are pushing to be able to impose taxes on digital transactions. “As revenue agencies want to continue to ensure that they’re getting their slice of the pie, they’re always going to be looking at digital goods and services and making sure that they are appropriately taxing and then being able to collect on those,” said Armbruester.
Cryptocurrencies like Bitcoin and Ether and the growth in popularity of nonfungible tokens, or NFTs, also are prompting more countries to reconsider their tax rules.
“Governments around the globe are struggling to not only keep pace with the technology, but also understand the taxation implications of that,” said Armbruester. “Can taxes be paid in digital currency? Those are things that states here in the U.S. are also grappling with. As currency continues to evolve, that will be something that businesses have to keep their eye on as governments decide what’s OK and what’s not.”
Accounting professionals should prepare their clients and their own organizations for the tax changes that could be coming this year. “As we make our way into 2022, the impact of the pandemic on consumer behavior and sales tax policy will continue to be felt,” said Armbruester. “Businesses should also brace for increased enforcement of remote sales tax laws as tax authorities shift their attention back to sales tax.”