There’s no way to sugarcoat it: Sales tax obligations are already difficult at the state level, but when you bring it down to local jurisdictions, or home rule jurisdictions, you get the next level of complexity.
Home rule jurisdictions are granted the authority by certain states’ constitutions to pass laws to self-govern. Setting sales taxes laws often fall under that umbrella.
Home rule state sales tax jurisdictions have been around for years, but only since Wayfair in 2018 have these jurisdictions been able to mandate sales tax collections for remote sellers. The sales tax obligations of the nation’s many home rule jurisdictions can be easy for brick-and-mortar sellers with physical nexus – but a mess for remote sellers with economic nexus and required to collect and remit sales tax out of their home state.
The idea of home rule “stems from strong … traditions and constitutional grants of local taxing power”, according to the Tax Foundation, which takes an excellent look at this issue
The major states so far
Local jurisdictions’ control over sales tax can vary widely. One of the most recent headline locales for home rule is Alaska, where local jurisdictions have formed the Alaska Remote Seller Sales Tax Commission to administer the collection and remittance of local sales tax. Alaska is one of the states without a statewide sales tax, but the banding together of these local jurisdictions have created a headache for remote sellers.
The Sales Tax Institute explains the complexities more by adding, “What is taxed in one jurisdiction may be exempt in another,”. The Tax Foundation goes on to state “In Alaska, Colorado, and Louisiana, this issue is compounded by the additional challenge of divergent tax bases, where different jurisdictions tax different baskets of goods and services.” Alabama on the other hand, has a unified tax base, meaning localities cannot make their own choices about what to tax and what to exempt, but many local governments handle their own tax administration.
Colorado has always been one of the more difficult states when it comes to managing sales tax. In the state, home rule jurisdictions can set both their own sales tax administration and their own sales tax bases – potentially increasing registration, filing, and remittance deadline burdens on remote sellers. (And more than a third of municipalities in the state are home rule municipalities, with most of those having their own tax administration.) As an example, the state of Colorado does not tax Software-as-a-Service (SaaS), but certain local jurisdictions including Denver do tax SaaS.
Alabama has instituted “simplified” taxes lower than the combined state and local rates and that relieve remote sellers from having to remit to each locality separately. Louisiana has similarly established a commission for remote sellers to serve as a single collection entity. Both plans still have some wrinkles in uniformity and enforcement, but generally, the concept seems to make life easier for remote sellers into these home rule states.
You may be wondering if other states will embrace the concept of allowing local jurisdictions to administer their own sales tax programs. Some recent examples include the following:
- Arizona and South Carolina now allow certain local jurisdictions to diverge from the state sales tax base. Rates can vary widely by product and service, though Arizona is trying, like Alabama and Louisiana, to streamline the sales tax burden and make it as simple as possible for out-of-state sellers.
- In Illinois, home rule units of local government are authorized to impose a Home Rule sales tax and certain non-home rule units of local government are authorized to impose a Non-home Rule sales tax. Both taxes are imposed on the same general merchandise base as the state sales tax, excluding titled or registered tangible personal property.
- The West Virginia Legislature created the Municipal Home Rule Pilot Program in 2007, empowering participating municipalities to “be creative in addressing local problems by implementing ordinances, rules, and regulations not otherwise available because of the various one-size-fits-all statutes that apply to all municipalities.” Dozens of municipalities – some very small – have joined.
Sales tax isn’t getting any easier, so why struggle to manage it on your own or with a provider who isn’t really alleviating the stress? Let TaxConnex manage the burden of keeping up with all the changes and challenges that come with staying on top of your sales tax obligations. Contact us to learn what it means when sales tax compliance is all on us.