In 2018, the Supreme Court ruled in South Dakota v. Wayfair that states can mandate remote sellers, or those without a physical presence in a state, to collect sales tax from their residents. After the Supreme Court’s decision, some states decided to pass new legal requirements for these remote sellers and these rules can vary state to state.
As of June 2021, all 45 states with a statewide sales tax as well as the District of Columbia decided to adopt requirements governing sales tax collection by remote sellers. These requirements were based on an economy instead of a physical presence, meaning instead of looking at brick and mortar locations they looked at the amount of sales in a state. Besides this, a majority of the states adopted requirements to shift tax collection obligations from sellers in an online marketplace to the businesses who are facilitating the sales like Amazon or Etsy.
As previously stated, the requirements differ in a number of ways between the states. This includes exemptions for small businesses below certain thresholds, effective dates, and how amounts are collected. These new requirements have brought billions in revenue to these states. For example, it was reported in 2021 that 33 out of the 45 states had a total of $23.1 billion in remote sales.
However, now that inflation is at an all-time high, these states are now offering sales tax holidays and other types of relief. These states are finding ways to reduce taxes due to the challenges that their residents are facing.
One specific challenge is the rising prices of gasoline which has an average cost of over $5 per gallon in many parts of the nation. Some states have suspended or reduced their gas tax to help offer relief. There are even some states that have suspended the sales tax on groceries for a period of time.
According to Sovos, there are a total of 53 bills on sales tax exemptions that states are considering; a 278% increase from prior years. Another relief option that states are providing are sales tax holidays. These tax holidays are traditionally held in the summertime for back-to-school sales, however, some states are creating a disaster preparedness sales tax holiday.
Although the tax relief is very helpful for residents, states need to consider how the reduction in tax revenue will affect them, especially with inflation pressures and increasing interest rates. Some states prefer to increase sales tax while reducing income taxes. During the pandemic, some states have realized how sales tax can be a dependable revenue stream for them. There is now a movement from states to expand sales taxes while decreasing income taxes.
Overall, sales tax in America can be very complicated. Especially when there are forty-five states as well as hundreds of different localities. Complicating the issue, the sales tax rates are different in each state as well as the ways the funds are collected. There are various definitions and rules for taxable products. It would be helpful to have a new sales tax system that has consistent thresholds and standards among states to allow businesses to comply more efficiently. It will be interesting to see if this comes to pass in the future.
