Sales Tax Fundamentals
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The Far-Reaching, Continuing Impacts of COVID-19 on Compliance
byFebruary 23, 2022
COVID-19’s impact on the economy wasn’t solely limited to 2020 and 2021 – they continue to be felt in 2022, and for the foreseeable future. From labor issues to impacts on a company’s tax obligations, your business has likely seen the changes first-hand. We’ll take a look back at how the government and private sector responded to the pandemic, and what impacts are potentially yet to come.
Labor issues multiply
At the beginning of the pandemic, it looked like unemployment rates might be pointed upwards for the foreseeable future. And while unemployment rose in 2020, the current unemployment rate is near historic lows. Demand for services went down with many Americans choosing to isolate, while the demand for goods stayed strong through 2021.
Many jobs that were previously done from an office went fully remote, which, for e-commerce companies operating in the U.S., brought up immediate compliance challenges related to nexus. Physical nexus is defined as your office or warehouse locations, but it can also mean where you have an employee working remotely. Having remote employees in a state different from where your company is based may put you on the hook for collecting, filing and remitting sales tax in certain states.
Some states like Minnesota and Pennsylvania have said that employees telecommuting due to the pandemic does not mean you have nexus in that state, while others like New York ruled that if a nonresident is telecommuting to a job in NY, it’s considered a day’s work in the state (unless there’s also an office in the employees location).
With the shift to online work, companies found themselves working hard on two fronts: trying to find qualified employees and paying additional taxes in multiple states due to newly remote employees. Some predictions say that unemployment may reach a 50-year low in 2022, evidence that the labor crunch is far from over.
Sales tax deadlines and rate fluctuations
The old saying is that nothing is certain except for “death and taxes,” but even taxes aren’t certain. Many states extended filing deadlines for businesses (and taxpayers) in 2020 after COVID-19 was declared a national emergency. (If you never want to worry about the timing of a filing deadline again, look into TaxJar’s AutoFile to help your business automate filing and remitting sales tax.)
And sure, businesses may have gotten a reprieve on filing in 2020, but they couldn’t avoid paying taxes, right? As it turns out, some states have proposed cutting sales tax in 2022 as a result of the pandemic. In early 2020, states adjusted their budget forecasts downward due to a presumed lack of spending from consumers. That didn’t happen, as the federal government put cash into Americans’ pockets via the CARES Act, which boosted spending on goods and services.
The spending caused an increase in sales tax revenues, which gave many states budget surpluses. States like Connecticut, Maine, Mississippi and New Mexico are all discussing potential rate cuts. Lawmakers in Utah are also considering a grocery tax credit, which would return money spent on food in supermarkets back to the consumers. Each state has different priorities with regards to budgeting in 2022, but it’s safe to say that sales tax rate changes will continue this year.
Online sales grow, increasing nexus possibilities for retailers
E-commerce experienced massive growth in the past few years. While consumers weren’t traveling or spending on services as much, they were still spending. According to Digital Commerce 360, online sales have grown exponentially in the past two years: “2021’s estimated 14.2% jump in digital revenue pales in comparison to the 31.8% spike in 2020, which currently is still the highest year-over-year increase since the U.S. Department of Commerce began recording ecommerce data two decades ago.”
While online growth is excellent news for e-commerce businesses like direct-to-consumer brands, it also means added compliance issues related to economic nexus. Many states have economic nexus thresholds; that is, the state requires businesses with revenues of over a certain dollar amount or number of transactions to collect and remit sales tax. (For a deeper dive into nexus and the thresholds for each state, this post is helpful.) Retailers will find that as their business grows, so do the number of states in which they have nexus – a good problem to have, if there ever was one. And because of that, the amount of time companies spend on paperwork for tax filing and remitting also grows, which is why automation is a popular solution.
The future of compliance related to the COVID-19 pandemic
As of this writing, the coronavirus appears to be waning in the US, but the end of the pandemic is anything but assured. How this will affect compliance is yet to be determined. Early signs are that spending on physical goods (like TVs) is beginning to wane in favor of spending more on services like travel and dining out. Services are generally not taxed in many states, though laws vary depending on the jurisdiction.
Just because services are generally not taxable doesn’t mean companies aren’t in danger of being non-compliant. States are more than willing to change both product taxability and sales tax rates, so it’s important to keep an eye on the sales tax changes from each state to stay compliant. Just this year alone, we tracked 88 sales tax rate changes spanning 18 states that went into effect on January 1, 2022.
Automated sales tax compliance platforms like TaxJar can also track those tax rate changes on behalf of your business, and enable your company to charge the right amount of tax to your customers in real-time, and then file and remit it to the state. Talk to our sales team to learn how TaxJar can automate your sales tax compliance today.