Sales and Use Taxes Account for Largest Net State Tax Increases in 2018

  |   February 11, 2019

The wheels of the Wayfair decision are turning across the U.S.

Federal tax changes had a ripple effect across many states in 2018. In fact, 13 states saw net increases to their sales and use taxes, as stated by a recent report from the National Conference of State Legislatures. In comparison, 10 states reported net decreases. While relatively on track with trends in recent years, these changes accounted for the most significant net tax increase at the state level, up by $847.1 million.

According to the report, 2018 proved to be a year of many challenges and opportunities in regards to taxes. “States grappled with major federal changes, continued phasing in their own reforms, and made new changes that altered their own landscapes,” the report noted, resulting in net revenue changes that were overall minimal.

Still, the number of federal changes was uncharacteristic, including:

  • The Tax Cuts and Jobs Act was signed into law, solidifying the largest overhaul of the U.S. tax code since 1986
  • Sports gambling was made legal in Murphy v. National Collegiate Athletic Association in May 2018
  • The U.S. Supreme Court’s decision in South Dakota v. Wayfair in June 2018 authorized states to require out-of-state sellers to collect taxes on remote sales

As a consequence, these landmark changes will force states to review their current practices and decide if updates are needed to accommodate the new rulings. In particular, the Wayfair decision will likely have an impact on the taxes of every for-profit and nonprofit organization, necessitating increased costs for goods or services as well as a greater need for due diligence if online sales continue to rise.

In the realm of sales and use taxes, remote sales taxation was at the forefront of conversation. With the $847.1 million net tax change, all tax categories – except for personal income taxes (down $44.2 million), alcoholic beverage taxes (no change) and health-care-related taxes (down $3.8 million) – saw increases.

The states incurring the largest increases in sales and use tax were Louisiana, Kentucky and Georgia, respectively. According to the report, “Louisiana’s $466 million increase was a result of the additional sales tax rate extension.” The additional rate was extended at a reduced rate of 0.45 percent.

Kentucky’s sales and use tax increase was due to the expansion of its base to include remote sales. The state reported an estimated revenue increase of $192.5 million for fiscal year 2019, but the change is expected to add an additional $3.2 billion to the state’s sales and use tax base.

Similarly, Georgia projected an increase of $113.9 million in sales and use tax revenues, primarily due to legislation creating an economic nexus to include remote sales.

According to the report:

  • Eight states (Georgia, Kansas, Kentucky, Louisiana, New Jersey, Oklahoma, Oregon and Rhode Island) and the District of Columbia increased their net taxes by more than 1 percent.
  • By contrast, Idaho, Missouri, Nebraska, New Hampshire and Wisconsin reported a net decrease of more than 1 percent.”

While these changes in taxes were driven mainly by developments that occurred outside of state legislatures, the result will mean a shift in policies for many states in 2019.

STATES ADOPTING ECONOMIC NEXUS STATUTES EXPECTED TO GROW IN 2019

As states consider their options and implement regulations on the collection of sales tax for online/remote sales, we’ve added four to our list of those adopting the same or similar economic nexus thresholds for sales and use tax collection purposes: California, New York, Texas, and Washington D.C.

California

Effective April 1, 2019, out-of-state retailers selling above certain economic thresholds into California will be required to collect California use taxes on their sales into California.

California adopted South Dakota’s thresholds. For out-of-state retailers, the new collection requirement applies if, during the preceding or current calendar year:

  • The retailer’s sales for delivery into California exceed $100,000; OR,
  • The retailer makes sales for delivery into California in 200 or more separate transactions.

New York

In 1989, New York created an economic nexus regulation that established New York’s definition of “vendor” for sales tax purposes. It had never been enforced. On January 15, 2019, New York’s Department of Taxation and Finance issued a notice stating that the regulation would immediately become effective. New York’s definition of a vendor includes remote sellers that in the preceding four sales tax quarters:

  • Have more than $300,000 in sales of tangible personal property delivered into the state; AND,
  • Has conducted more than 100 sales of tangible personal property delivered into the state.

Texas

Beginning October 1, 2019, Texas will begin enforcing a requirement that remote sellers engaged in business in Texas are subject to tax if their total Texas revenue in the preceding twelve calendar months is greater than $500,000.

Washington D.C.

Effective January 1, 2019, Washington D.C. also adopted South Dakota’s thresholds. If, during the preceding or current calendar year, Out-of-state retailers will be required to collect sales tax if in the previous or current calendar year, they:

  • Have more than $100,000 of gross receipts from retail sales delivered into D.C.; OR,
  • Have more than 200 separate retail sales delivered into D.C.

Resources

Questions about sales and use tax updates? Please contact James Ortiz in our State and Local Tax Department at 505-998-3468 / jortiz@redw.com.

REDW maintains both a map of U.S. states and a comparison chart that provides details on each state’s current economic nexus status.

Other articles on the South Dakota v. Wayfair decision:

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