With five days to go until the election, we don’t know what the political landscape will look like next year, but one thing is clear: State lawmakers will be working on conformity with the Tax Cuts and Jobs Act (TCJA) and taxing remote sales in the wake of the U.S. Supreme Court’s Wayfair decision. Although there are a number of big issues that could arise in 2019--such as taxation of services, gas taxes, corporate rate changes--these two will feature prominently in any state tax discussion.
Since the TCJA’s passage last December, state lawmakers have been trying to determine how their governments should respond. It’s an ongoing project that is only just getting started. Federal tax reform moved the American tax code from a worldwide system to a quasi-territorial one by taxing a portion of US dividends from foreign subsidiaries, and that has significant ramifications for states. For example, states must now decide whether to incorporate international receipts into a taxpayer’s tax liability by conforming with federal provisions related to Global Intangible Low-Taxed Income (GILTI). If they choose to do so, they also have to decide whether to conform to the associated Foreign-Derived Intangible Income Deduction (FDII).
Many people in the tax policy community think states should not follow the feds in taxing beyond the borders of the United States, but there are some thinkers who disagree and want to reshape how states approach taxes.
Unfortunately, these taxes don’t make a lot of policy sense on the state level. In an era when calls on state resources are greater than ever, states may be hesitant to decouple from these provisions and give up their attendant revenue. More fundamentally, with residents in some areas facing higher state tax liabilities as a result of the TCJA, lawmakers will likely resist cutting rates to compensate.
These are complicated questions and state policymakers will have to think hard about how they want to deal with them. They started that work this year — MultiState counted 36 enacted federal tax conformity bills this year — but most states have failed to squarely address many of these issues.
Taxing Remote Sales Post Wayfair
While federal conformity issues have only sprung up in the last few months, this summer’s Wayfair decision allows states to do outright what they have been not-so-subtly trying to do for years. As we’ve noted previously, prior to the Court’s ruling, states were eager to get more e-commerce revenue and enacted a patchwork of legislation designed to push the envelope of the physical presence test.
Wayfair obviates the need for these workarounds and allows states to approach the issue directly. Within the next few years, we can expect nearly every state with a sales tax to finalize some kind of remote seller tax collection scheme.
Although the policy is inevitable, there are still many policy details that lawmakers will have to address in the short-term, and those efforts will lead to significant legislative debate. One pressing issue is whether other states, regardless of their population, will maintain the same sales thresholds that were originally designed for South Dakota (i.e., 200 separate annual sales or $100,000 in revenue). There is also an ongoing debate about whether to apply these thresholds retroactively to garner additional revenue; Florida received considerable pushback earlier this year when it considered this idea, but there is nothing in the Court’s ruling the specifically precludes retroactivity. Finally, Wayfair has also opened the door for states to tax marketplace facilitators like eBay and Amazon, but there are a number of technical hurdles that they will have to overcome including determining whether the seller or the marketplace is responsible for remitting the tax, who would be subject to audit, and how to deal with exemption certificates.
Interstate organizations like the Multistate Tax Commission and Streamlined Sales Tax Project have been working with state lawmakers and business stakeholders to identify best practices and model language. Once their work is done, it will likely lead to a wave of regulatory and legislative activity.
The Rare Bipartisan Issues
One of the reasons these issues have so much staying power in state legislatures is that they do not have clear partisan angles. This year several blue and red states decoupled from aspects of federal tax reform, while other blue and red states have decided to stay in conformity to keep the associated revenue.
On the sales tax side, Republican-controlled South Dakota pioneered the legal framework that allows for taxing remote sellers, but it is being widely embraced across the country. Consequently, unlike the traditional battle lines where Democrats generally want to raise taxes and Republicans generally want to cut them, federal conformity and remote sales taxation are areas where lawmakers are theoretically able to dig into the issues on their own merits and reach a bipartisan consensus on what policy is right for their state.
Many tax bills’ potential will live and die based on the political landscape that is established next week, but regardless of the election results, these two issues are going to be with us for years to come.