Pivotal Sales Tax Developments Expected in 2023

As we step into a new economic era, changes are on the horizon, particularly in the realm of sales tax policies. States have been meticulously reviewing their sales tax strategies, aiming to benefit taxpayers and streamline their systems. In 2022, we witnessed several bold tax proposals, and it appears that 2023 will be no different.

For professionals responsible for sales tax compliance, staying ahead of these evolving trends is crucial. In collaboration with our sales tax experts, we delve into three prominent sales tax trends for 2023 that could have significant implications for your business operations.

Economic Nexus Threshold Governance

States are increasingly recognizing the need to simplify and standardize their sales tax regulations, particularly in the realm of economic nexus. One avenue through which states aim to make life easier for taxpayers is by eliminating economic nexus transaction thresholds and relying solely on dollar threshold amounts. Different states might adopt varying dollar thresholds based on business size.

This issue gained substantial attention during the Senate Finance Committee hearing on the impact of Wayfair on small businesses and remote sellers. Additionally, a report by the Government Accountability Office (GAO) highlighted that employing transaction counts to determine remote seller nexus imposes a significant burden on small businesses.

In recent years, several states have either removed transaction count thresholds (such as Colorado, Washington, Wisconsin, and Maine) or enacted legislation without any transaction thresholds (including Florida, Missouri, and New Mexico). South Dakota, as an influential member of the Streamlined Sales Tax (SST) initiative and the pivotal case in the Wayfair decision, has taken on a leadership role. The state is actively encouraging other streamlined sales tax states to eliminate their economic nexus transaction thresholds.

Taxation Trends in Consumer Data Collection

Sales tax trends often originate in specific regions before expanding nationwide. An emerging trend in the Northeast region involves the implementation of consumer data collection taxes, alongside digital advertising taxes.

Maryland pioneered the exploration of digital advertising taxes in recent years, sparking similar considerations in Massachusetts and New York. However, these states have shifted their focus away from digital advertising taxes toward levying taxes on revenue generated from selling consumer data. For instance, Massachusetts has proposed a monthly tax on the collection and sale of consumer data pertaining to Massachusetts residents by commercial data collectors.

Are these alternative approaches more viable than digital advertising taxes? Taxing such transactions under information services or data processing tax frameworks could enhance their feasibility.

One obstacle in taxing digital advertising is the potential conflict with the Internet Tax Freedom Act. Unlike physical advertising, which is typically untaxed (except for instances like billboard rentals), taxing digital advertising raises concerns about imposing taxes on previously untaxed forms. Addressing the objective of taxing digital advertising-related activities through data taxes could find more success in states already accustomed to taxing data processing or information services.

How does this impact individuals and businesses?

The elimination of transaction-based thresholds is particularly beneficial for smaller businesses, especially those that do not engage in marketplace sales. Many of our clients find themselves well below the economic dollar threshold, but the 200 transaction threshold forces them to register. Removing this component of the threshold will substantially reduce the compliance burden on these sellers. In conclusion, 2023 promises to be an eventful year for sales tax policy changes. Staying informed and adaptable to these evolving trends is vital for businesses and professionals involved in sales tax compliance.

Exemptions for Essential Items from Sales Tax

A growing trend in various regions of the country revolves around the introduction of new sales tax exemptions targeting essential items. These exemptions primarily focus on personal hygiene products diapers, and groceries, with a notable shift towards eliminating taxes on items deemed necessary for daily life.

In recent years, there has been a concerted effort to address the so-called 'pink tax,' which disproportionately affected women by taxing feminine hygiene products. As a result, many states have taken steps to remove taxes on such products.

When it comes to groceries, defined as unprepared food for human consumption, several states have either offered partial exemptions or full exemptions. However, even states that were once hesitant to exempt groceries have started to change their stance. For instance, Kansas initiated a phased elimination of its grocery food tax last year. Virginia has also embraced this trend, issuing a bulletin outlining the exemption of food and essential personal hygiene products from the state's 1.5% sales and use tax, effective January 1, 2023. These items will remain exempt from regional and additional local tax rates, although they will still be subject to a 1% local option tax.

Colorado and Wisconsin are among the states set to implement similar exemptions in 2023. Notably, South Dakota's Governor Noem has made the elimination of the state's 4.5% sales tax on groceries a top priority for the 2023 legislative session. It's worth mentioning that 37 states currently do not impose sales tax on food. South Dakota, however, stands as one of only three states that tax groceries at the full sales tax rate without any compensatory tax credit.

While the elimination of taxes on essential items aims to alleviate the regressive nature of sales tax, it does prompt questions and concerns regarding the need to raise sales tax rates to compensate for the reduction in the tax base.

Taxes Related to Consumer Data Accumulation

Sales tax trends often emerge in specific regions before spreading nationwide. A notable trend gaining traction in the Northeastern United States is the concept of consumer data collection taxes, often intertwined with digital advertising taxes. Maryland was among the pioneers in experimenting with digital advertising taxes over the past few years. Subsequently, Massachusetts and New York explored the possibility of imposing excise taxes on annual revenues from digital advertising.

However, these states have recently shifted their focus. Instead of digital advertising taxes, they are now considering levying taxes on revenue generated from the sale of consumer data. For instance, Massachusetts has proposed a monthly tax on the collection of consumer data from its residents by commercial data collectors, as well as on the sale of personal information.

Why might these new taxes be more successful than digital advertising taxes? Taxing these transactions under the umbrella of information services or data processing tax structures might offer a more promising approach.

Taxing digital advertising faces challenges due to potential violations of the Internet Tax Freedom Act. Unlike physical advertising, which is typically exempt from taxation (except for instances like billboards as rental property), taxing digital advertising essentially involves taxing something that remains untaxed in its physical form. Transitioning towards taxing elements related to digital advertising through data taxes could prove more successful, especially in states that already tax data processing or information services.