This article originally appeared on January 1, 2020 in Law360.
From the myriad ways the Wayfair decision continues to spur an expansion of economic nexus, to the reemergence of gross receipts taxes, state tax professionals will have much to monitor in 2020.
The Wayfair decision, which abolished the need for physical presence before states could compel retailers to collect and remit sales and use tax, will continue in 2020 to reverberate throughout the state tax world. Although all but two states with a sales tax had implemented Wayfair by the end of 2019, the coming year will feature struggles between states and businesses as they deal with the practical aspects of expanding sales and use tax nexus to out-of-state sellers.
Marketplace facilitator legislation, which almost 40 states have adopted as a companion to Wayfair, also is proving more complicated in practice than it seemed in theory, and 2020 will see a push to have states simplify those laws. Meanwhile, a small but growing number of states are seeking new revenue by establishing gross receipts taxes, which had all but disappeared but now seem to be coming back.
Here, Law360 looks at state and local tax policies to watch in 2020.
The Fallout From Wayfair — Sales and Use Taxes
In 2020, the Wayfair statutes of most states will have been in effect for a year, which states will view as adequate time for businesses to have come into compliance, said Charles Maniace of the software tax compliance company Sovos Compliance LLC.
“States in 2020 are going to move from carrot to stick,” Maniace, vice president for regulatory analysis and design at Sovos, told Law360. “States have been in educational mode, but now, I think they are going to move to enforcement.”
Small and midsize businesses may not be prepared for such a transition, Maniace said. Many of them are still figuring out their compliance obligations. Those that know where they should be filing may not have the staff or the necessary software to bring them into compliance in multiple states, he said.
Both in interviews with Law360 and in public forums, Brad Scott, owner of a small online jewelry materials wholesaler in Arizona, has said trying to comply with Wayfair is crippling the company of 30 people he leads with his wife. He has moved to spending all of his professional time and much of his personal time on compliance efforts, he said.
Scott said he was still hoping for a federal uniformity solution for remote sellers. Absent one, he said, he is not sure if his company will survive.
Maniace said he was not sure if states were really ready, either. He said he thought many would have to reevaluate their audit procedures and protocols to handle a much larger sales and use tax base.
“You can't audit and enforce in the same way as you did when all you cared about was in-state sellers,” Maniace said. “I don't think states have thought about that, and until they do, things have the potential to be chaotic.”
Complicating businesses' compliance with Wayfair are the companion marketplace facilitator statutes many states have adopted. State tax professionals expect to see more states adopt such statutes in 2020, while other states, such as Michigan and North Carolina, will see recently adopted statutes go into effect.
“There is a lot of confusion,” said John Hayashi, managing director of tax at BPM LLP, noting that answers to basic questions, such as how to define a marketplace facilitator, differ from state to state.
This absence of clarity has resulted in marketplaces and sellers struggling to determine who has primary collection responsibility and what requirements remain with the seller when collection obligations fall on the marketplace.
“Do you have to register if you are a seller?” Hayashi said. “What about if you are doing direct sales as well as selling on the marketplace?”
Hayashi said he hoped that 2020 would bring uniform answers to these questions. Both the Multistate Tax Commission and the National Conference of State Legislatures have recently produced blueprints states can follow to achieve more uniformity and clarity in their marketplace laws. But as Hayashi noted, that would require legislators to go back to their new statutes and implement changes.
The Fallout From Wayfair — Business Taxes
Wayfair did more than knock down the physical presence requirement for collecting and remitting sales and use tax, state tax professionals said. It also clarified that physical presence is not required for imposing other taxes. More states in 2020 are likely to apply the Wayfair standard of economic nexus to corporate income tax and other business tax types, they said.
“I think now the policy development that is starting to get some steam behind it — and I am surprised it has taken this long — is the application of Wayfair to the corporate income tax,” said Scott Smith of BDO USA LLP. “Wayfair is not just a sales tax case. It's a state tax case.”
Hawaii, Massachusetts and Pennsylvania have recently adopted an economic nexus standard for the corporate income tax. Some cities, such as San Francisco and Philadelphia, have done so as well. Texas and Washington have no corporate income tax but have adopted an economic nexus standard for the franchise tax, and the business and occupation tax, respectively.
“We're going to see a lot more states coming out with formal statutes or regulatory authority to apply Wayfair to the corporate income tax,” said Smith, technical practice leader for state and local tax at BDO.
As Smith suggested, how states will go about extending the Wayfair standard to business taxes is another question for 2020. Like the imposition of economic nexus standards for the sales and use tax, states so far have chosen different methods. Hawaii adopted economic nexus for the corporate income tax by passing a law. Texas, Massachusetts and Washington went through the regulatory process.
Pennsylvania, however, extended economic nexus to the corporate income tax simply by issuing a notice, which provided no opportunity for public comment or input from tax professionals, who hope other states don't take that route.
“They are legislating, is what they are doing,” said Jennifer Weidler Karpchuk of Chamberlain Hrdlicka White Williams & Aughtry. “I would say that is arguably not in their authority. I think it is really a stretch for the department to have issued that via notice.”
Gross Receipts Taxes
States looking for new revenue sources in 2020 may join a slow but steady trend of starting a gross receipts tax. Such taxes, levied on gross rather than net income, were once almost nonexistent, and are still not common. But they are making a comeback in some places.
In the last few years, Ohio has implemented its commercial activities tax, with Oregon set to join it in the beginning of 2020. Among other states, Nevada, Texas, Delaware and Washington also have gross receipts taxes. Among localities, Portland and San Francisco have such taxes.
State tax policy experts often frown on gross receipts taxes, saying their ultimate effect is that the consumer will pay more as the business passes on the cost of the tax. But states like them because they are so broad. A state can pass a gross receipts tax with a fairly low rate but raise a great deal of revenue because of the number of businesses the tax will fall on.
States may also want to pass gross receipts taxes to help them avoid the limitations of their corporate income taxes, said Weidler Karpchuk. One of those limitations is that while the Interstate Income Act , popularly known as P.L. 86-272, is not as strong as it once was, it still may shield some business activity from the corporate income tax, she said.
For states, Weidler Karpchuk said, gross receipts taxes are “a nice little way to get around that.”
Reclassification of Workers
California in 2019 reclassified a large swath of independent contractors as employees for state tax purposes, a move that New York and other states may follow in 2020. California's statute, A.B. 5, is an employment law, not a tax law, but Jeffrey Davine of Mitchell Silberberg & Knupp LLP told Law360 it was a top concern of his clients.
“In my view this is the most important issue from a tax perspective in California right now,” Davine said.
The potential tax changes are many, he said. Instead of paying an independent contractor a flat sum and filing Form 1099, a business working with a contractor-turned-employee would have to withhold income taxes and pay the employer's portion of Federal Insurance Contributions Act taxes. Employers would also face having to pay unemployment taxes, reimburse business expenses and provide any number of other benefits traditionally offered to employees, among other considerations.
“This is going to have a lot of ripple effects and ultimately is going to cost companies a lot more money,” Davine said.
He said he understood the intent behind the law, which was to extend more rights to contractors, but said A.B. 5 went too far and created myriad, perhaps unintended, negative consequences.
“They've taken a sledgehammer to the problem when maybe a much smaller tool was needed,” Davine said.