State and Local Tax (SALT): What's New and What's Next
At the end of each quarter, our team analyzes what’s new and what’s next with SALT legislation. Below, we’ll talk about trending topics making headlines today and offer insight into changes we expect to see in the coming months. Q1's big 'so what' is all about businesses feeling the pain of overly complex nexus legislation. Let's take a closer look.
SALT: What’s New | Q1 2022
Businesses Feeling the ‘Undue Burden’ of the Wayfair Decision are Speaking Up (and Filing Lawsuits)
After the South Dakota v. Wayfair ruling, the Supreme Court requested economic nexus legislation to include provisions designed to protect against undue burdens on interstate commerce.
South Dakota’s tax system included several features designed to support this:
1. Small Business Protections
South Dakota created a built-in safe harbor in their nexus legislation. By using an economic threshold of $100,000 or 200 transactions, small businesses were typically excluded from owing tax on interstate sales, theoretically protecting them from undue tax burdens.
So what's the problem? Each state with sales tax nexus legislation has enacted similar threshold legislation, but each state's version is slightly different. Varied laws with nuanced differences make it confusing for businesses trying to understand their interstate tax obligations.
2. No Retroactive Application
Retroactive application of a law that makes punishment greater than the law in place at the time of the transaction violates the ex-post-facto provision of the US Constitution. In the Wayfair ruling, specific stipulations state that businesses have no obligation to remit retroactive sales tax. That means businesses only have to register, collect, and remit sales tax on transactions made once they pass a state’s threshold ($ or #), given that the state law’s effective date has already passed.
This provision is very logical. Many businesses wouldn’t be able to bear the financial burden retroactive tax liabilities would cause. It would also be deeply unfair to issue a massive retroactive tax bill, given that businesses have no way to plan for this. This is a very sound application of the law, and we expect it to stick.
3. Efforts to Streamline SUT Legislation
South Dakota is one of more than 20 states that adopted the Streamlined Sales and Use Tax Agreement (SSUTA) - an initiative to simplify the process of creating legislation for and managing the process of SUT collection and remittance. Unfortunately, with this concept still in its infancy, the word ‘streamlined’ is misleading at best. However, the fact that SSUTA even exists is a pretty good indicator that there may be an ‘undue burden’ on businesses.
Despite efforts to streamline legislation, almost four years post-Wayfair, rules are more complex than ever. A majority of states have enacted economic nexus legislation, and varying thresholds are just the tip of the iceberg when it comes to undue burden related to the Wayfair decision. Each state applies nexus law differently, and often, definitions of what is or isn’t taxable are fuzzy at best. As a result, businesses are getting vocal.
Post-Wayfair Litigation is Picking Up Steam
Halstead Bead Inc. v. Louisiana is a great example of a lawsuit that stemmed from a business fed up with the lack of clarity brought on by economic nexus legislation. The company filed a suit against the state of Louisiana, arguing that Louisiana’s SUT collection system is unconstitutionally complex.
Rather than abiding by a state-wide compliance regulation, Louisiana uses a parish-by-parish sales and use tax system. Each parish sets its own rates and collects its own taxes. Halstead Bead’s complaint argues that this structure violates the Constitution’s Commerce Clause and Due Process Clause by creating a “compliance nightmare.” Louisiana asked a federal court to dismiss a lawsuit filed by this Arizona-based online business, which was granted on January 7, 2022.
The case was dismissed on the grounds that “the plaintiff lacks standing and that the complaint ignores the Louisiana Sales and Use Tax Commission for Remote Sellers, which the Legislature created in 2017 to serve as a collector for all remote sales for certain remote dealers.” The timing of this case is particularly interesting as it was filed just days after Louisiana voters rejected a constitutional amendment that would have required the state to move to a streamlined framework for the collection and distribution of SALT.
Many Businesses Remain Blissfully Ignorant to Economic Nexus Liabilities
A large number of companies are still ’waiting it out’ when it comes to addressing their sales tax liabilities in response to the Wayfair ruling. However, this choice is becoming increasingly risky as the first round of post-Wayfair audits rapidly approaches. The issue is that most businesses don't have the staff or knowledge to evaluate and determine nexus obligations effectively– so many are simply choosing not to, hoping they can escape any scrutiny from state revenue departments. However, this decision is poised to backfire as states funnel more money into audit tools that will help them crack down on non-compliant businesses.
Compliance can be expensive, but non-compliance is much more expensive, especially when businesses end up facing costly penalties across multiple tax jurisdictions. We encourage accountants to be proactive by surveying clients to estimate exposure, performing nexus studies for clients that have a high risk of being audited, and providing advisory services to help clients get back on track.
Ecommerce Businesses are Confused by Widely Varied State Marketplace Laws
Thirty-one states have added marketplace clauses to their SUT legislation–meaning marketplace sales are considered when calculating nexus thresholds. However, many businesses are still in the dark about what this means in terms of their tax liability.
Once again, nuanced details are buried in mountains of legislative doctrines and paperwork. Details vary substantially from state to state– regarding lookback periods, gross receipt totals vs. retail sales, registration deadline rules, and so on.
We anticipate these challenges will eventually lead to broader cooperation among states to streamline how marketplace legislation is implemented as marketplace facilitators continue to grow in popularity and number.
SALT: What’s Next in 2022
So what changes can we expect to see as we move deeper into 2022?
Here’s what we anticipate:
- 1. Some States Will Implement Tax Treatment Policies for Remote Workers
The 2019 Global Workplace Analytics and FlexJobs report show that remote work increased a staggering 91% over the past ten years - and that was before the pandemic. These numbers skyrocketed in 2020, and we’ve seen remote work grow by 159% in the past 12 years. At this point, we can anticipate that remote or hybrid work will continue to be the standard way of operating for many companies.
When the COVID-19 pandemic began, many states issued temporary guidance on how to tax remote workers. However, given the workforce trends detailed above, some states will likely evaluate the longer-term impact based on the rise of remote employees. We also anticipate that some states will implement longer-term regulations on how to handle income tax for employees who temporarily work from a different state.
- 2. We’ll See a Resolution to Taxation on Advertising Revenue
Earlier this year, Maryland legislators approved a highly contested digital advertising tax. The tax would be applied to gross revenue derived from digital advertising services. Rates would escalate from 2.5-10% of the advertising platform’s assessable base (based on annual gross revenues from all sources).
This base would consider all revenues - not just those derived from digital advertising and not just revenues in Maryland. The escalating rate scale is designed to exclude any entity with less than $1 million of gross revenues from digital advertising services in Maryland and $100 million in annual gross revenues.
The question is– will it dissolve or prevail? There’s tons of upside for states in the form of revenue gains. However, they need to tread lightly because Maryland’s version of this legislation is being hotly debated in court and has even been called unconstitutional.
We expect that states will try to figure out a way to make this income taxable–but defensible. We also anticipate any legislation that is passed will carefully omit small and mid-size businesses, focusing only on larger entities.
- 3. More Wayfair Challenges are Coming
We work with accountants every day and can confidently say that most businesses are not currently compliant with economic nexus laws. We expect this to change rather quickly in 2022 as we start to see the outcome and impact of the first round of post-Wayfair audits. Unfortunately, some businesses may become an example of what not to do.
We encourage all accounting firms to be proactive in supporting their clients. Again you can do this by performing nexus studies, taking advantage of voluntary disclosure agreements, identifying high-risk issues, and remedying what you can before the auditor makes his way to your clients.
We also foresee that as these audits occur, more court cases will make their way to state legislatures as businesses argue against undue burdens– caused by ambiguous language in legislation, mixed tax term definitions, and a painful lack of consistency. We hope to see continued efforts to streamline, simplify, and digitize tax compliance in an effort to make forward progress towards a more unified process.
There’s one thing we can predict with absolute certainty: SALT legislation will continue to evolve and change. Each quarter, we’ll continue to provide insight on what’s new and what’s next so you can stay on top of hot topics, trends, and major developments that impact your team and your clients.