Sales Tax Transformation: Understanding the 2023 Landscape

Are you aware that nearly 75% of small businesses find sales tax compliance increasingly challenging? As we enter 2023, several critical changes in sales tax laws could impact your business. Whether you're a small business owner or a tax professional, understanding these developments will help you stay compliant and avoid unnecessary penalties.

Making Economic Nexus Thresholds

Why are states making changes to economic nexus rules?

In recent years, states have been looking at their local sales tax policies, particularly around economic nexus (a term that means the connection a business has with a state that obligates it to collect sales tax). Right now Many states currently use two criteria to decide: the number of transactions and the dollar amount of sales. However, this system has proven burdensome, especially for smaller businesses that make many small sales but don’t reach high dollar amounts.

What's changing?

In 2023 many states are taking steps to make these rules easier by getting rid of the transaction count requirement for sales tax. They're now focusing on the dollar threshold. For example:

• Colorado, Washington, Wisconsin, and Maine have already removed the transaction count threshold.
• Florida, Missouri, and New Mexico set nexus thresholds that only consider the dollar amount, disregarding the number of transactions.
• In addition, the new nexus rules mean that businesses must be more vigilant about the sales tax obligations they incur. Companies will need to track not just their sales volume but also the specific sales tax rates that may apply in different states. This added layer of compliance can be particularly challenging for small to mid-sized businesses that sell products online.

How does this affect your business?

If your business has trouble with the 200-transaction rule, these changes could reduce your compliance workload, particularly regarding sales tax requirements. You may not need to register in states where you don't reach the money threshold, which could save you time and cash.

New Taxes on Consumer Data Collection

What’s happening with digital advertising taxes?

Digital advertising taxes have been a hot topic in recent years, especially in the Northeast. States like Maryland led the charge, but taxing online ads has proven tricky. The Internet Tax Freedom Act poses a major challenge, as it stops states from taxing Internet access and placing unfair taxes on e-commerce.

The new focus: consumer data collection and sales tax.

In 2023, states like Massachusetts and New York are looking at a different strategy: taxing the sale of local consumer data along with implementing sales tax measures. Here's what this might involve:

• Massachusetts has suggested a tax on companies that collect and sell data about its residents.
• New York is considering similar plans, focusing on revenue from data sales rather than digital ads.

Why does this matter?

If your business depends on gathering and selling consumer information, these new taxes might increase your expenses. It’s important to monitor these developments and be prepared for possible changes in your tax responsibilities.

Exempting Essential Items from Sales Tax

What’s the trend with sales tax on essential items?

Sales tax on everyday essentials like groceries, diapers, and feminine hygiene products has been debated for years. These are basic things in life that are needed daily, yet historically have been taxed, which enhances the price to consumers.

What's new in 2023?

More states are recognizing the need to exempt these items from sales tax, following a broader trend to make sales tax less regressive (i.e., less burdensome on lower-income households). Notable developments include:

• Kansas is expected to fully phase out its grocery tax in 2022. Full exemption for groceries is expected to be in place by 2025.
• Virginia recently did away with its 1.5% grocery and important personal hygiene items sales tax.
• South Dakota now joins the 37 other states actively debating the elimination of its 4.5% sales tax on groceries.

How does this impact you?

For consumers, this means savings on necessary items previously subject to sales tax. For local businesses, especially those in retail, it’s important to stay updated on which products are exempt to ensure proper tax collection and reporting.

The Growing Importance of Staying Informed

Why is there a need to be informed about the changes in sales tax?

Sales tax laws are complex and ever-changing. What worked last year might not apply this year. As states continue to adjust their tax codes, staying informed is key to avoiding costly mistakes.

Tips for staying compliant:

• Regularly review your nexus status: With changing rules in any of the states, your obligations change. Reassess your activities against each state's activities to make sure you are registered where needed.
• Monitor legislative changes: Monitor new tax laws currently being passed, particularly legislation that applies to digital advertising and consumer data.
• Seek expert advice: If you are still in doubt about how these changes relate to your business, it will be good if you contact a tax professional specializing in sales tax.

How Kintsugi Helps You Navigate These Changes

AT Kintsugi, We know sales tax compliance can be very hard to navigate, and with so many changes on the horizon, this only looks to get more and more complicated. That is why we are here for you: expert advice, up-to-date information, and tools that make compliance easier. From simplifying your nexus obligations to making sense of new consumer data taxes, Kintsugi will help ensure your business stays ahead of the curve.

The year 2023 is most likely to be a very eventful one in terms of sales tax policy. From threshold simplification at the nexus level to new taxes levied on consumer data, businesses need to stay vigilant. Be ahead with these developments, and partner with Kintsugi for better management of the changing tax landscape and keeping your business compliant.