With all that 2020 brought with it, the rapid acceleration of ecommerce offered up ample opportunity for many sellers to embrace ecommerce for the first time or expand their online presence. In fact, according to the U.S. Department of Commerce, nearly $1 out of every $5 spent during the third quarter of 2020 came from orders placed online. As we look back on all of the change and acceleration that happened throughout 2020, we know that it will have a lasting impact on ecommerce. As a result, we can expect that governments around the world will be implementing new tax policies in response to the changes.
Here are three tax changes that will likely have an impact on ecommerce sellers in 2021.
Enforcement is Coming
Economic nexus laws and marketplace facilitator laws have opened a new door for tax authorities to drive revenue through the collection of tax owed on online sales since their introduction in 2018. However, widespread enforcement of these laws has yet to be seen as authorities allowed sellers and marketplaces time to comply with the new regulations—but that is no longer the case.
The acceleration of ecommerce combined with the economic impact of the pandemic has quickly brought any notion of a grace period for these laws to a halt. Some states are using AI and data mining technologies to identify noncompliant businesses, while others are shopping online themselves to see whether or not tax is being charged. In terms of intent to enforce, Kansas Revenue Secretary Mark Burghart said the department intends to go after noncompliant remote sellers, starting with large sellers before moving on to small sellers. In 2021, ecommerce and marketplace sales are expected to continue to grow, as is the enforcement of economic nexus and marketplace facilitator laws.
Playing Catch Up
In addition to enforcement, 2021 will likely see the expansion of economic nexus legislation to two new states—Florida and Missouri. In 2020, Florida saw its sales and use tax collections drop as in-person sales and tourism decreased due to COVID-19. As we move into 2021, the Sunshine State has two bills the seek to adopt sales tax economic nexus that would go into effect July 1, 2021, if passed into law. While the revenue collections in Missouri haven’t been as heavily impacted, many in the state are pushing to add remote sales tax in 2021. A House bill introduced in November could be signed into law this year. If Florida and Missouri take the leap, that would bring the number of states with economic nexus to 45, plus the District of Columbia and some local governments in Alaska.
Local Tax Expands
Drilling down below the state level, we find that many local governments in home rule states take advantage of their authority to levy local sales tax. For many local governments, the pandemic has hit hard, creating deeper deficits. In Alaska, more than 30 cities and boroughs already require some out-of-state sellers to oblige by economic nexus, with six more cities working to implement the law.
Because of the heavy impact on local economies, several cities are looking to expand taxes to drive new revenue streams. Indianapolis, Indiana, and New Boston, Texas are just two examples of cities that are working to tax streaming services, like Netflix and Hulu. In Chicago, the city has applied an amusement tax to streaming services for quite some time, but the mayor is seeking to increase the tax on cloud software and infrastructure in 2021. Sellers will not only need to be aware of the tax changes at the state level but also keep an eye out for the expansion of taxes at the local level throughout the year.
We know that 2021 will bring its own level of uncertainty, especially as it relates to sales tax changes. However, we do know that as the pandemic continues and governments work to balance their budget sheets, sales tax expansion and enforcement is highly likely. As ecommerce further accelerates and more sellers expand their ecommerce operations, the need to have the technology in place to accurately manage sales tax will become increasingly more important.
A full rundown of all the changes to tax in 2021 can be found in the 2021 sales tax changes report.
Liz Armbruester is the SVP, global compliance at Avalara
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