What’s new in May for state sales and use taxes
There’s always something changing in the world of tax, especially sales tax. Here’s a review of some of the recent changes and updates.
Food for thought. Exempting groceries from sales tax as American families struggle with inflation and other economic woes is politically tempting. Kansas and Tennessee just became the latest states to green light such exemptions. But Alaska’s recent wrangling points out how tricky lawmakers can find the concept.
The state capital of Juneau reportedly collects $6.2 million in taxes a year on the sale of groceries. Despite all good intentions of municipal representatives of both parties, replacing the revenue that would be lost with a sales tax exemption on groceries has been plagued with what one city finance director called “choice overload.”
The city has tried many approaches, including exempting only foods covered by SNAP, the federally funded program that helps low-income households buy food. Though that omitted such items as pet food, it was a start. Then the $6.2 million shortfall landed. Assembly members agreed to replace at least half of that – with what?
Early discussions bandied property taxes and temporary hikes in sales tax (Alaska doesn’t have a state-wide one). More recently, the Assembly is considering repealing or tightening other existing sales tax breaks, reports said, only to find that each proposal – whether to raise resort-season sales taxes or eliminate exemptions for nonprofits or sellers of heavy vehicles – has many vocal supporters.
Voters will likely be asked this fall if they’re willing to increase the city’s 5% sales tax to 6% during the summer in exchange for exempting food from sales tax year-round.
Time for a renovation? States’ sales taxes account for almost 30% of state tax revenue, but most sales taxes are imposed on narrow and still-narrowing bases, according to a new report from the Tax Foundation. Among other findings: Sales tax bases range from 19.32% of personal income in Massachusetts to 93.89% in Hawaii; the Massachusetts base is extremely narrow, while the Hawaii base features significant tax pyramiding.
“Sales taxes have become less neutral, less equitable, and less economically efficient over time,” the Foundation said.
An old story. The Massachusetts Supreme Judicial Court has accepted a direct appeal from an internet retailer contesting the Department of Revenue’s position that the in-state presence of cookies and apps were sufficient to satisfy the physical presence nexus standards in place prior to the 2018 Wayfair Supreme Court decision.
The Department assessed use tax on the basis that the cookies and apps placed on the devices of Massachusetts-based consumers was sufficient to create physical presence nexus. The Massachusetts Appellate Tax Board disagreed, determining cookies and apps did not satisfy the physical presence standard for pre-Wayfair periods, while also rejecting the Department’s position that Wayfair should be applied retroactively.
Taking license. Colorado will no longer require remote sellers, “retailers without physical presence or with only incidental physical presence,” to have local licenses in the state’s some 70 home-rule cities.
Beginning July 1, Colorado cities cannot charge out-of-state businesses for local licenses. Starting July 1, 2023, cities will be prohibited from requiring the licenses. Instead, the state tax department will be responsible for collecting information from remote sellers and providing that information to local jurisdictions. The new law reportedly aims to simplify the state’s sales and use tax collection processes and provide less of a burden on out of state businesses post-Wayfair.
In other moves, new Colorado legislation awaiting gubernatorial signature permits a retailer with total taxable sales in the amount of $100,000 or less to retain 5.3% of the sales tax reported as compensation for the retailer’s expenses incurred in collecting and remitting the tax (vendor fee) for sales made in 2023, rather than retaining a 4% vendor fee, as under current law. Also awaiting signature is HB22–1118, “Sales and Tax Use Refunds,” which changes details of processes around sales and use tax refunds. The Colorado Department of Revenue also looks to review all sales and use tax exemption forms with an eye to simplifying the exemption application process; initial review will be completed by mid-2023.
Finally, Colorado enacted a use tax exemption for construction materials used to build and renovate public schools across the state effective July 18 and including the home rule cities of Westminster, Pueblo, Commerce City and Boulder. Opponents promise legal challenges.
Alabama has enacted that some agriculture products are exempt from sales and use tax if these sales are made by the producer, immediate family or an employee. Examples cited in the legislation include whole cuts of meat, bound cut flowers, jams, jellies or boiled or roasted peanuts. This law takes effect from Oct. 1 until September 2027.
California manufacturers want the state to halt taxes on the purchase of new equipment, saying those taxes are hobbling the industry as manufacturers aim to modernize production as supply chain issues continue. Proponents say California taxes both the production equipment and the product at some of the highest rates in the country.
Kentucky has enacted multiple tax changes, including expansion of the services subject to sales and use taxes. These services now include photography and photo finishing; marketing; telemarketing; public opinion and research polling; lobbying; executive employee recruitment; website hosting, design and development; facsimile transmission; many private mailroom and parking services; security system monitoring services; and others. Exclusions include sales of the services in fulfillment of a lump-sum, fixed-fee contract, or a fixed-price sales contract executed on or before Feb. 25 this year. For gross receipts from the sale of newly taxed services prior to Jan. 1, 2023, if the gross receipts were less than $6,000 during calendar year 2021, the services are exempt.
Louisiana’s senate has rejected a plan passed earlier by the state’s house to phase out a temporary sales tax over the next three years.
Nebraska has enacted a bill that will exempt sales tax on certain purchases made by large data centers. Now effective, this law allows “tier two” centers to apply for sales and use tax exemptions for some rentals and equipment purchases.
New York local government sales tax collections grew 21.1%, or $901 million, in 1Q22 compared with the same period last year, according to the state comptroller. Collections for the three-month period totaled nearly $5.2 billion, with growth at least partially driven by inflation.
The New York Supreme Court, Appellate Division, has held Apple Inc. accountable for not collecting an appropriate amount of sales tax on the promotional gift cards given with certain purchases. During the back-to-school season, Apple gave away gift cards as a promotion for purchases of computers such as the MacBook, iMac and iPads. The gift card was given away as part of the promotion at no charge with a discounted price on the product as well. The New York Supreme Court upheld the decision of the New York Tax Appeals Tribunal affirming that Apple improperly under-collected sales tax by discounting the purchase price of products, resulting in $995,000 in sales tax.
Ohio has determined that a taxpayer’s purchase of equipment used in hydraulic fracturing was not exempt from Ohio sales and use tax as the equipment was not used directly in the production of crude oil and natural gas.
The Ohio Tax Commissioner’s denial of the taxpayer’s sales tax refund relating to its purchase of computerized services was upheld in part and remanded for further proceedings, as the court failed to apply the true object test. The taxpayer, a bank, purchased computerized services that maintained the accounting system and services on a real-time basis. It claimed that these services were exempt as accounting services and as customization of software.
Texas sales tax revenue totaled $3.83 billion in April, 12.8% more than in April 2021. Total sales tax revenue for the three months ending in April 2022 was up 22.3% compared to the same period a year ago. Sales tax is the largest source of state funding for the state budget, accounting for 59% of all tax collections.
Wisconsin has updated guidance that states that marketplace providers are responsible for the collection and remittance of the Wisconsin premier resort taxes.
If you think your business may be impacted by sales tax developments, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more.