Sales Tax: Strategic Thinking as Your Business Plans for 2024

As 2023 comes to an end, lets recap a few important sales tax changes and offer insight into what taxpayers can expect for 2024:

·      Economic Nexus Transaction Counts – Initially, more than half of the states adopting economic nexus thresholds included a transaction count element as part of the threshold, meaning that a remote seller would be deemed to have sales tax nexus with a state if sales exceeded either the revenue threshold or the transaction count threshold.  Not only are the transaction counts arbitrary and more burdensome to track for remote sellers, but they have an outsized impact on small businesses and sellers with high volume / low price point sales per transaction.  For example, a business with an average sale of $20 can exceed a state’s 200 transaction threshold with only $4,000 in sales. This point has been made and observed by The General Accounting Office’s November 2022 “Report to Congressional Requesters, Remote Sales Tax, Federal Legislation Could Resolve Some Uncertainties and Improve Overall System”.  As of August 2023, Louisiana became the latest in a growing number of states that have dropped the transaction count from their sales tax economic nexus threshold.  South Dakota dropped its transaction count effective July 2023, in addition to 8 other states that had previously adopted a transaction count as part of their nexus threshold (CA, CO, IA, ME, MA, ND, WA, WI).  You can learn more about both measures in the linked Economic Nexus chart on our website.  The Streamlined Sales Tax (SST) Governing Board, and its State and Local Advisory Council also seek to remove the transaction count component from SST states, as a best practice. 

·       Digital Products, Cloud Computing and SAAS – while there was very little notable movement legislatively or administratively in regard to sales tax treatment of digital goods and services, cloud computing or SAAS in 2023, states continue to use the sales tax audit as one principal means of interpreting existing (i.e., old) laws to broaden the definition of taxable sales to (1) impose tax on formerly tangible items currently available via digital means and (2) impose tax on new technology-based products and services that did not previously exist in a tangible format.  It is critical that sellers of these products and services utilize sales tax experts to properly classify these products according to each states sales tax rules.

We expect to see more states – in particular those participating in SST – do away with the transaction count in their sales tax economic nexus threshold. 

What does 2024 look like?  We expect to see more states – in particular those participating in SST – do away with the transaction count in their sales tax economic nexus threshold.  However, certainly propelled by the global pandemic, more companies are allowing their employees to work from home, and employees are now requiring it as a condition of employment.  This means that more companies previously considered remote sellers have physical presence nexus that may otherwise not exist in a state under economic nexus thresholds.  

In addition, states will continue to expand their sales tax base to include sales of digital products, cloud computing and SAAS.   Our consulting work with this year with clients in this space highlights this.  For example, our research and state polling work with a large online gaming company yielded interesting results.  That is, of the states that determined the subscription fees to the online gaming platform were taxable, some states determined that even though these were SAAS.  Other states determined that this was taxable as a digital product.  And still others determined that this was a taxable admission.  This exercise highlights that states – even though they may not have changed their sales tax laws or rules to specifically impose tax on such online products – are eager to impose the sales tax and will often interpret their laws to do so. Sales tax experts can guide taxpayers in determining the appropriate treatment of their sales, and help automate the compliance process, so that tax treatment is updated as states change tax rules and policy.

[W]e expect 2024 to also be a year in which state sales tax audit divisions will contact registered taxpayers to verify that sellers are taxing their goods and services appropriately

In 2021, 2022 and continuing through 2023, we experienced increased audit activities from several states (in particular California, D.C., Illinois, New York, Texas, Wisconsin and Washington) around these issues, and we expect this to continue.  According to the Urban Institute, state sales tax revenue collections slowed to near zero growth in the first quarter of 2023 relative to a year earlier, and declined 1.5% in the second quarter of 2023 relative to a year earlier.  This is largely due to inflationary spending adjustments by consumers.  Furthermore, personal income tax revenue collection declines are in the double digits in 2023 relative to a year earlier, and are projected to continue, in large part fueled by state tax rate cuts and a declining stock market.  States will look to balance or enhance their coffers using the sales tax audit, which has an immediate and significant impact on revenue collections.

As such, we expect 2024 to also be a year in which state sales tax audit divisions will contact registered taxpayers to verify that sellers are taxing their goods and services appropriately, and to verify that taxpayers registered when they first triggered economic nexus in the state.  State sales tax auditors see the audit of remote sellers as “low-hanging fruit”.  Some states, such as Illinois, significantly changed their local sales tax compliance obligations for remote sellers in 2021, something many taxpayers only realize once audited. 

As states continue to expand their sales tax base – particularly through informal policy changes and interpretations of existing laws – it is critical for sellers to routinely monitor their sales to ensure that they are properly coded as taxable, particularly for sellers of digital products, cloud computing and SAAS.  In addition, as more businesses have permitted employees to work from home during the pandemic, or have hired employees in additional states - even those employees in a non-sales, administrative capacity - these companies have unintentionally expanded their sales tax nexus footprint, necessitating the need for increased sales tax compliance.

So much has happened in the world of sales tax nexus over the past five years, that many other areas of sales tax ... often get overlooked.

So much has happened in the world of sales tax nexus over the past five years, that many other areas of sales tax – particularly what is taxable, and the states’ compliance requirements – often get overlooked.  It is imperative that companies proactively seek the regular guidance and input of experienced sales tax professionals, and that they implement automated sales tax compliance into their processes, not only to ensure that they are registered in each state in which they have nexus, but also to ensure that they are compliant with the ever-changing sales tax rules.