State and Local Tax: The Good, The Bad, and The Ugly
The year 2024 is poised to usher in a series of sales tax changes that will impact businesses across various industries. From the constantly evolving rates to amendments in compliance requirements, companies need to be proactive in staying informed to mitigate potential risks. But what’s new & what should you be on the lookout for?
This article will tell you what trends our team at Source Advisors are seeing in the use of automation tools, where we are noticing an uptick in audits, and some state specific insights for certain industries to be prepare for another fun year in tax changes. The Good, The Bad, and The Ugly plus how we can help.
We will start with the GOOD…
+ Simplification of Taxes:
Some states are removing the 200 transactions rule from remote seller thresholds such as Lousiana and South Dakota in 2023 following other states lead in 2022. Colorado created the Sales and Use Tax Simplification Task Force to better understand how a simplified sales tax system would benefit sellers. The Ohio Commercial Activity Tax (CAT) is undergoing changes on January 1, 2024 for small businesses. The CAT is out of the bag and the tax will be eliminated for those businesses with less than $3M in Gross Receipts – this threshold is expected to change again in 2025.
Lots of companies we talk to say they are immediately going to de-register for some of these local taxes. There is a concept called trailing nexus which means that even if you do not hit registration qualifications in a particular year, your company may still have the obligation to collect and remit for a certain period of time. Source Advisors can provide guidance on the state specific rules and take the tedious work out of manually filing returns if you would like to outsource them completely.
+ AI and TaxTech Tools:
Let’s face it – AI can make life easier. Many sales tax automation companies have developed AI modules and are adopting Machine Learning (ML) tools like Ocular Character Recognition (OCR) technology to enhance their software and help streamline manual processes like data entry. Avalara, for instance, uses OCR technology to help read exemption certificates and map to customer records in some ERP systems/e-Commerce Carts. The taxability of these new technologies is still widely undefined but AI is spreading like wildfire in popularity so we may see changes on the horizon…you might even be considered a late adopter if you have yet to try AI in some form.
Keep in mind the free version of ChatGPT is dated a few years. We are an Avalara Partner – meaning we have access to many of the premium tools and can make recommendations for any manufacturers/wholesalers/resellers on if ML or automation tools make sense for your exemption certificate collection & renewal process.
+/- Holiday Spending & Retail Growth Forecasted at an All-Time High:
The National Retail Federation predicted November and December spending to grow between 3% and 4% but then Robinhood said consumers are continuing to shop for discounts post-Black Friday/Cyber Monday. The NFR predicts retail sales overall in 2023 will grow between 4%-6%. We will have to see how the retail sector of the economy pans out once 2023 financials are wrapped up…but this may mean the states will ensure they collect on the sales tax revenue.
Throughout the last few years, many companies have had to pivot adding omni-channel revenue stream and things like Marketplace sales have it’s own unique set of challenges. We can provide advice on different channels & systems and perform risk assessments to keep you compliant. Holiday sales can quickly surpass the thresholds starting at $100,000 per state – contact us if you would like a year-end review.
Now, we have to be honest and say that some of the good has overlay with the BAD…
+/- Rates changes to accommodate inflation
Stripe reports that some states have introduced more sales tax holidays than in previous years. Tennessee has a grocery sales tax holiday that exempts grocery items for a three-month period. South Dakota decreased their sales tax rates and New Mexico lowered their gross receipts tax. Texas is exempting menstrual products, baby bottles and diapers – we see you TX! This trend is great for consumers but is hard for businesses to manage plus may lead to more audits. Others states like Colorado and New York have implemented Retail Delivery Fees and Minnesota’s goes into effect January 2024. The Chicago Lease Tax (or Personal Property Lease Transaction Tax) remains which applies to remote sellers and includes many SaaS companies, whose sales into Chicago exceed the threshold of $100,000.
For companies that don’t have tax automation, Source Advisors will assist these clients with annual reviews to ensure their compliance processes are up-to-date. Even with sales tax automation, we notice many SaaS clients who are missing unique tax codes for the Chicago PPLT and are offering free consultations to check your tax codes. Also, we can provide audit support if that terrible, horrible, no-good time comes.
2024 was a banner year for sales tax collection which also means it’s a banner year for sales tax overpayment:
Many companies don’t realize they overpay on their products or services just as much as they underpay. Companies need to be diligent to make sure they are issuing the proper exemption certificates on their business purchases.
We have a large team dedicated to helping companies identify if they have overpaid on their purchases. If you think you may have overpaid, then please reach out.
And finally, we can’t avoid the UGLY…
Undeniable uptick in audits:
At the beginning of last year, many companies were not fearful of audits, saying the states will likely face the same staffing shortages as all employers but now it seems they are operating at nearly full capacity. Towards the end of this year, we have seen an increase in audits for SaaS-based companies in WA or NC – where things like canned vs. customized software make a difference in taxability or who your customers are make it difficult to collect accurately, respectively. TX is coming after solar companies. The common thread: there’s a service element to most, whereas, at the beginning of the year, the focus was on remote sellers or omni-channel companies.
Remember it’s important to have representation even if there is no negative assessment as it may mean you are due a refund your auditor is not telling you about.
In summary, the trend of combining services with software is quickly becoming the optimal strategy to give you peace of mind and ultimate assurance that your company is getting state and local tax right because one thing is certain….in 2024, sales tax continues to be so complicated that it even makes us SALT-y at Source Advisors.
Contact Source Advisors if you would like to learn how we can help your business.