by Liz Armbruester
After a tumultuous two years of the global pandemic, significant uncertainty remains. Supply chain issues, the risk of inflation, and the changing labor market are just a few factors global businesses are monitoring as they define their strategies for the next 12 months. Amid this uncertainty, brands will also have to navigate shifting tax obligations throughout 2022.
Many of the factors impacting businesses today are also influencing changes in tax. For example, the combination of supply chain and labor woes is contributing to a more complicated tax compliance environment as businesses seek new supply chains and distribution channels to keep operations up-and-running. Emerging technologies and the shift to remote work has also raised questions around compliance, as the workforce continues to grapple with the uncertainty of in-person work as new virus strains stoke ongoing concerns.
As we move forward into 2022, small businesses should be aware of how new tax requirement rules and expanding digital taxes will affect their compliance obligations and overall operations.
Online Sales Tax for All
Nearly four years after South Dakota v. Wayfair, Inc., all states with sales tax have implemented economic nexus and marketplace facilitator laws. These laws allow a state to impose a sales tax obligation on a remote seller based on transactions made in their jurisdiction, which creates a nexus. As of 2021, all states with a sales tax had adopted remote sales tax laws — making them the norm across the US. Remote sales tax laws have been around for nearly four years, yet tax compliance remains complicated because each law differs by state.
For example, states like Alaska, which has no sales tax, may tax remote sales. Additionally, an economic nexus law can affect even businesses dealing primarily or exclusively in exempt transactions in the state. Local governments are also looking to benefit from the Wayfair decision, which will complicate and increase the cost of compliance even further. Colorado has more than 70 jurisdictions with broad taxing authority and some have adopted local nexus provisions. As a result of these moves, the Colorado Department of Revenue is working to streamline registration, collection, and remittance of local sales taxes for remote sellers.
The consumer shift to ecommerce and increase in remote sales has also changed compliance obligations for marketplace facilitators. Marketplace facilitator laws require marketplaces to collect and remit sales tax on behalf of third-party sellers and have been enacted in all states with a sales tax, as well as Puerto Rico, Washington, D.C., and a growing number of local governments in Alaska. While marketplace facilitator laws create obligations for marketplaces, they also create sales tax complexity for marketplace sellers as their marketplace sales can contribute to their economic nexus requirements in certain states.
The onus to register after establishing nexus always falls on businesses, so compliance should be top of mind as we get further into the new year. Sellers can leverage the power of technology to automate the process and mitigate compliance risk while also experiencing the added benefit of delivering a more streamlined and efficient customer experience.
State Taxes Go Digital
Rapid technological innovation continues to outpace the reach of regulators and legislative bodies, but as we have seen recently, some states are trying to catch up. For example, one of the most controversial taxes is a new tax on digital advertisements adopted by Maryland in early 2021. In its aftermath, seven states and Washington, D.C. followed Maryland’s lead by introducing similar taxes. While the laws come with their fair share of opponents, the measures show that states are looking for ways to extract revenue from emerging technologies and the 21st century economy.
In addition to digital advertising, states will also pay greater attention to transactions that bundle digital goods and services this year. Determining the taxability of bundled products and services is always difficult, even when the products are tangible. The Tennessee Department of Revenue recently ruled that sales tax applies to the sales of subscription packages that contain at least one taxable item and are sold for one non-itemized price, but whether a company should report tax upfront, on the lump sum, or on a monthly or periodic basis depends on the terms of the sale — leading to further confusion for businesses.
Tax authorities will continue to evolve their tax strategies to capture revenue from this digital-first world. To stay compliant, businesses will need to adopt tax technology that will allow them to stay on top of shifting requirements and new digital tax processes. If the past two years taught us anything, it is that nimble and dynamic strategies that leverage the power of technology are helping organizations stay ahead of compliance obligations. Whether it is adjusting to nexus laws, obligations from the digital world, or new and unusual tax rules, these strategies will continue to remain essential as organizations evolve with changing regulations and market conditions over the next year.