Tax & Budgets
In Which Cases Will the U.S. Treasury Recoup Federal Recovery Funds Used for State Tax Reductions?
May 18, 2021 | Neal Osten, Morgan Scarboro
With the excitement surrounding the prospect of federal tax reform, plus more than half of the states facing revenue shortfalls, we expect tax policy to be one of the most prevalent issues at the state legislative level in 2017. Below, we've identified the key tax issues we anticipate seeing this year.
One of the biggest state tax trends we saw last year was legislation aiming to ensure that as many sellers as possible comply with sales tax laws (particularly remote — or online — sellers). Because Congress has failed to act to resolve this issue, states have pushed forward on their own. One strategy they've pursued is passing legislation with the intent of putting the question directly to the U.S. Supreme Court (with the hopes of the Court overturning Quill).
Overall, we saw 42 bills introduced in 16 states last year, with five bills ultimately enacted (Alabama, Louisiana, Oklahoma, South Dakota, and Vermont). States used a variety of approaches to achieve enhanced compliance. The first was legislation changing nexus requirements. These types of bills took several forms—some states created affiliate or economic nexus requirements, while others imposed requirements on marketplace providers of required referral registration. The second approach was legislation imposing reporting or notification requirements. The third “approach” is less of an approach and more of a catch-all category for those states that didn’t pursue the first two strategies (for example, legislation preparing for federal action or legislation to study the topic further).
2017 will be no different—eight states have introduced 11 nexus bills so far (Indiana, Minnesota, Mississippi, Nebraska, South Carolina, Virginia, Washington, and Wyoming). The Wyoming bill, which is patterned after last year's South Dakota legislation, already passed the first chamber and will now move on to the state senate.
State and local governments impose varying taxes on short-term lodging rentals, and oftentimes taxes on rentals booked via an online marketplace aren’t collected as legally required. This creates a tax disparity between traditional and non-traditional lodging accommodations. Unfortunately, it would be burdensome for a property owner who occasionally rents a room to register, collect, and remit taxes, so compliance is and will continue to be low without appropriate changes.According to our tracking of last year's legislation, of the 83 bills dealing in some way with short-term rentals, 47 of these (in 20 states) included some sort of tax provision. Ultimately, five states enacted seven tax-related bills, though the states will likely work further on many of these bills in 2017. Some of the enacted bills changed definitions of existing hotel and transient occupancy tax laws to include lodging booked via an online marketplace, while others created study committees to examine the issue further. Indiana, Maryland, and Oregon have already introduced bills on this topic in 2017.
Fortunately, the expansion of online lodging marketplaces provides a built-in solution that eases burdens on property owners and supports compliance with tax laws in a simple and efficient way. The solution is to clarify that online lodging marketplaces are responsible for collecting and remitting applicable taxes on short-term rentals facilitated through those marketplaces. These marketplaces have all of the information needed to ensure tax compliance at the ready, and the marketplaces also facilitate the transfer of funds from the renter to the owner. This solution meets standard principles of taxation, such as simplicity, neutrality, and transparency. A distinction should be made between online marketplaces that act as a financial intermediary and those that do not. Tax collection and remittance is feasible for the former, but may not for the latter.
Taxes on business personal property do not align with common principles of taxation (such as neutrality, efficiency, transparency, benefit, or ability-to-pay); distort markets by discouraging capital investment, expansion, and replacement; and impose high administrative and compliance costs. Since property taxes are primarily a local revenue source, the current business personal property tax system is characterized by inconsistency within states regarding property classification, assessment methods and ratios, and other rules, creating complexity and confusion for taxpayers.Thirteen states considered bills to limit or eliminate TPP taxation last year, and that momentum has continued in 2017. As of mid-January, we've already seen nine bills introduced in seven states (Colorado, Connecticut, Indiana, Missouri, Nebraska, South Carolina, and Texas). Most of these bills expand existing TPP tax exemptions, exclusions, or credits, which would whittle down the tax base (Colorado, Indiana, Nebraska, and South Carolina), while a few phase out the tax over a number of years (Connecticut and Texas), and one eliminates the tax altogether (Missouri).
Recognizing the economically detrimental nature of personal property taxes, most states have enacted provisions limiting their scope or simplifying administration, and several have eliminated them altogether.
“1) there is no clear evidence that profit shifting to tax havens is eroding the state corporate tax base; 2) state tax haven blacklists are arbitrary and unmanageable; and 3) states adopting tax haven legislation risk losing investments and jobs, and face constitutional challenges.”Despite this, we still expect to see a few tax haven bills in 2017.
May 18, 2021 | Neal Osten, Morgan Scarboro
May 11, 2021 | Ryan Maness
April 27, 2021 | Ryan Maness