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Wayfair and beyond: Major sales tax issues for 2019

Last year’s Supreme Court ruling in Wayfair may be getting all the attention, but there are some other areas of sales tax and state and local tax that practitioners and their clients can’t afford to ignore, according to Avalara’s Scott Peterson.

In an interview at Avalara Crush 19, held earlier in May in Huntington Beach, California, Peterson, who is the vice president of U.S. tax policy and government relations at the sales tax compliance solutions provider, shared both the latest details on the impact of Wayfair, and identified a number of other tax issues that will be worth paying attention to.

Lodging tax
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“Anyone who’s paid attention to the rise of Airbnb, Expedia and so on won’t be surprised to hear that lodging tax is a major issue,” Peterson said.

There are two issues with lodging taxes: who they are imposed on, and the fact that they’re extremely localized.

“Airbnb and Expedia are in every state looking for customers, but the lodging taxes are usually imposed on the operator of the facility, not Airbnb or Expedia,” he explained. "I expect all of those to change — moving the legislative language from taxing who’s operating it, to taxing the transaction. I expect to see that kind of thought process move around the U.S., but most of the work needs to be done at the city level. Eventually, they’ll all move to a model where they tax the person who has the money — Airbnb and Expedia.”
Motor fuel tax changes
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Rising use of electric cars may lower greenhouse gas emissions — but it also lowers the revenues that governments can expect from gas and other related taxes, with potentially major repercussions for funding highways and paying for road maintenance.

Given the ongoing erosion of that tax base, “I was surprised there weren’t more big motor fuel tax changes in the past year,” Peterson said. “If electric cars keep growing, we’re going to see more and more states move the cost of highways into an upfront cost when you buy the car, or an annual fee.”

States may impose fees on electric charging stations, he noted, but there is no easy or politically acceptable way to impose a fee or tax when people recharge their electric vehicles at home, and while Oregon is experimenting with a voluntary program where drivers’ cars are fitted with tracking devices so that the state can charge them for exactly how many miles they drove on local roads, Peterson pointed out that many Americans would be very uncomfortable with that kind of constant surveillance.
Marketplace rules
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In the wake of Wayfair, many states are looking at legislation to impose sales taxes through marketplaces and marketplace facilitators like Amazon, Ebay, Etsy and the like.

“A lot of these laws take the third-party seller out of the transaction,” Peterson said. “They simply treat the marketplace facilitator as the seller. They may include language relieving the third-party seller of tax responsibility, provided they’ve been given a certificate that the marketplace is saying they’re taking care of it.”

States like this idea in part because it reduces the number of sellers they have to deal with from hundreds of thousands to just a handful. “They don’t want to handle thousands of applications from remote sellers,” Peterson said. “They don’t have the resources to register all these people.”

This will be an area of tremendous complexity, both because states will have to create rules that fit the wide range of very different operating models that various marketplaces run on, and because many sellers are on multiple marketplaces. “Accountants are going to have an awful lot of clients with income and information and data coming from an awful lot of sources,” Peterson pointed out. “The cost of selling on each platform will be different — it’s a great opportunity for CPAs and accountants to add value.”
Feminine hygiene products
Sales tax in the U.S. is based on taxing tangible personal property, which has thus far included feminine hygiene products, such as tampons and pads, but people around the country are suggesting that they should actually be exempt from tax.

“It’s kind of an equity thing, because only one of the sexes has a need for them,” Peterson said. “So there’s a movement around the United States to exempt these because they are a necessity of life. So if you live in a state that doesn’t tax groceries because they are a necessity for life, or you live in a state that doesn’t tax clothing because it’s a necessity of life — well, feminine hygiene products are a necessity of life.”

Thus far, some states have introduced bills and debated them, only to see them killed, but he expects to see more discussion of the concept going forward.
A fresh look at tax philosophies
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One common thread to the areas mentioned above, and to Wayfair, is that they are driven by changes in markets, consumer behavior, technology and the overall economy that have left state scrambling for revenue — and forcing them, in many cases, to rethink their approach to taxes. Whether it’s the specifics of what constitutes taxable tangible personal property or changes in legislative language to alter how taxes are imposed on your stay in a hotel room, or even broader shifts such as moving toward consumption taxes and away from income taxes.

“Every state has a desire to be a manufacturing hub,” Peterson said, “but if you have a corporate income tax, you want to have the income apportioned based on something other than payroll and property. State are moving all toward sales — maybe keeping payroll and sales, but double- or triple-weighting sales. This is a perfect example of governments trying to catch up. They need to change their laws.”
The elephant in the room
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Of course, the existence of all these other issues doesn’t mean that Wayfair can be ignored, as more and more states work on new legislation and rules.

“It seems like we’re in chaos now — every week someone is doing something — but it’s exactly the same thing someone else did last week,” Peterson said. “They’re not being particularly creative — sloppy, sometimes, but not creative.”

As an example, he noted that a number of states have adopted model sales tax legislation based on the South Dakota model that the Supreme Court based its decision on — but the language doesn’t always work from state to state. Michigan, for instance, used the South Dakota model, but the model discusses gross receipts, and Michigan doesn’t use gross receipts as part of its general tax regime.”

And more changes are likely on the way, he predicted: “Wayfair is going to ripple — folks in state and local governments are going to look at their taxes and see what about those taxes automatically forces the payor to be someone in that jurisdiction.”