Top Sales Tax Trends to Watch in 2023
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COMMENTARY | The current economic uncertainty will shape state and local government changes to tax policy.
While state and local budgets generally fared well in 2022, ongoing economic volatility poses a new risk for state and local government leaders. Facing an uncertain future, they are now forced to closely examine existing tax policies and consider changes to mitigate any possible shortfalls.
As a result, we are likely to see several tax changes in the year ahead, including major updates to tax policy, new sales tax holidays and temporary exemptions, and the taxation off emerging technologies for new revenue sources.
Policy Changes Ahead
Expanding state sales tax bases in the past couple of years was generally a non-starter for policymakers in the wake of the Covid-19 pandemic. But that moratorium has been lifted, so to speak, and now some states are either broadening or exploring the idea of broadening the sales tax.
Take Colorado. It recently enacted a retail delivery fee of 27 cents on every order delivered by a motor vehicle if an item included in the order is also subject to the Colorado sales tax.
And in Kentucky, the sales tax there now applies to approximately 35 new services, including household moving, marketing and executive employee recruiting services.
Another hot topic among policymakers in several states is whether businesses should be responsible for collecting and remitting local sales and use taxes. In home-rule states like Alabama, Alaska, Colorado and Louisiana, cities, counties or other local governments have the authority to administer and establish their own sales tax rates and rules. But it is extremely onerous for businesses to comply with numerous local tax regimes.
So these states are doing their best to simplify and centralize the process. For example, after the Wayfair decision in 2018, Louisiana created a sales and use tax commission which serves as the sole entity to collect and remit state and local sales and use taxes from remote sellers. The legislature may go even further to create a similar commission for in-state businesses in the upcoming year.
New Sales Tax Holidays and Other Temporary Exemptions
Temporary exemptions, sales tax holidays and tax-free weekends were popular among states in 2022. Roughly 18 states and the territory of Puerto Rico have one or more annually recurring tax-free weekends. Other states like Florida frequently provide one or more sales tax holidays, but the state legislature must establish them each year.
There are currently 37 tax-free events in 23 states and Puerto Rico scheduled for 2023, and that number could grow. States have been known to cancel or suspend sales tax holidays when their budgets are tight. Alternatively, when the economy is more stable states create new tax-free weekends.
Revenue Departments Looking to the Future
New tech developments tend to spark new tax policies, and it’s getting harder for state legislatures and departments of revenue to ignore cryptocurrency, digital goods and services, and NFTs.
Lawmakers in approximately 37 states introduced a wide range of legislation related to cryptocurrency in 2022, but most of the enacted bills either regulated or restricted it.
States are also getting serious about taxing NFTs. In May of last year, the Pennsylvania Department of Revenue added NFTs to its list of digital products subject to sales tax. And in July, the Washington State Department of Revenue issued detailed guidance on the taxability of transactions involving NFTs. We can expect this pattern of legislation to continue into 2023 as policymakers look to digital products as additional sources of revenue.
Scott Peterson is the vice president, U.S. tax policy at Avalara.
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