State lawmakers across the country spent 2017 debating whether major tax policy changes were necessary to keep up with their state's growing demands. Whether it was reconceptualizing business taxes, broadening the sales tax base, or levying taxes on more internet sales, legislators were willing to explore big ideas. These proposals were almost universally defeated, but the fact that the discussion occurred at all is a signal that elected leaders are looking to make major changes.
Gross Receipts Tax Legislation Pops Up, Gets Cut Down
In 2017, lawmakers took a run at replacing their traditional corporate income taxes with gross receipts-based taxes (GRTs). By taxing a company's total revenue instead, these lawmakers argued that businesses would have a much lower tax rate and broader base, and the tax would be easier to administer. This isn't new, and the economic literature is clear that GRTs are unwieldy and lead to all kinds of economic distortions. But 2017 was the year when a couple of states (notably West Virginia, Oregon, and Louisiana) decided to trot it out and see if they could use it to ease their budget problems. Despite support from their respective governors and compelling revenue difficulties, each of these proposals was defeated in the face of intense political pushback. Time will tell whether GRTs will come up again in 2018 (notably an election year), but all three of those states still face long-term budget challenges, and drastic changes are probably going to be necessary. Read More...
States Push the Limit by Experimenting with Sales Tax Nexus Legislation
As more Americans do their shopping online, states have increasingly felt that sales taxes have not kept pace with the times. Under the U.S. Supreme Court's current jurisprudence, a state can only collect sales tax on a transaction if the seller has a physical presence with the state. In an effort to gather more revenue and force the Court to reevaluate its standard, states have been experimenting with legislation that pushes the boundaries of when the state can collect sales tax. These experiments have included expanding the definition of physical nexus to include utilizing an in-state agent to facilitate a sale (usually called “expanded nexus”), requiring sellers who do not collect the sales tax to inform their customers of their duty to remit themselves, requiring sellers to collect if they utilize an in-state marketplace provider (such as Amazon or eBay), and, more recently, acting in contravention of the Court by requiring remote sellers to collect the tax if they have more than a certain threshold of sales into the state (called “economic nexus”).
In total, 34 states introduced 81 pieces of legislation affecting sales tax nexus rules, with notable enacted bills coming from Indiana (economic nexus), Minnesota (marketplace provider), Rhode Island (expanded nexus), and Wyoming (economic nexus). Read More...
States Consider Expanding Sales Tax to Services in Effort to Shore Up Revenues
At the beginning of last year, we predicted that 2017 would be the year that state lawmakers seriously considered expanding their sales tax bases to include new services. The rationale was that state budgets were under strain, there was a political opening due to state partisan breakdowns, and a generalized trend away from income taxes. After 24 states introduced 47 bills on the topic in 2017, we felt pretty good about our original prediction. These bills typically fell into one of a few categories: bills that sought to tax all services generally as a part of a sweeping tax reform package, bills that would tax most services (except professional services), and bills that would tax certain enumerated services (pet care, security, landscaping, and cleaning were all popular targets). Of the introduced bills, only one has been enacted so far: an Ohio bill that expands the sales tax to enumerated services. Read More...
South Dakota v. Wayfair Could Shake Up How Sales Taxes Are Collected Across the Country
State revenue officials from across the country have been keeping a close eye on South Dakota for over a year now, waiting to see if the U.S. Supreme Court will take a case that could upend how sales taxes are administered. In 2016, South Dakota passed legislation ( SD SB 106) that requires out-of-state sellers to collect sales tax if they had annual sales into the state of more than $100,000 or more than 200 separate transactions in the state. As a clear violation of the Court's precedent in Quill v. North Dakota, the law was passed to invite a legal challenge.
After months of legal maneuvering, South Dakota has submitted its cert petition (which includes maps and research from MultiState Associates) to the highest court in the land and is waiting to hear whether the justices will agree to hear the case. Current word is that the justices could decide whether they will take the case in the next few months in advance of formal arguments later this year.
What to Expect in 2018
Usually lawmakers are more hesitant to pursue tax policy in an election year, but because half of the states are facing budget deficits, most won't be able to avoid it this year. The states with the biggest deficits (like Illinois, Louisiana, and New York) are keyed up to explore more drastic changes, but it's unclear whether the mounting fiscal pressure is enough to overcome the political opposition those ideas saw in 2017.
This year will also be a year of states reacting to congressional tax reform. Lawmakers in several blue states are already looking for ways to avoid some of the costlier provisions of the new law, such as allowing taxpayers to make federally deductible charitable contributions to the state in lieu of taxes. Other Democrats will use the new law as opening to advance their plans for a more progressive tax code. Finally, as more concrete forecasts about the effects come out, we can expect lawmakers on both sides of the aisle to adjust their fiscal priorities accordingly.