Sales and Use Tax in 2020: A Look Back

Someday people will probably use a lot of words to describe 2020. “Un-eventful” won’t be one of them.

The year’s ongoing pandemic affected almost every aspect of life – including, and in no small way, sales tax, which was already an area that has seen unprecedented change since the Supreme Court’s Wayfair decision in 2018.

Add to that, jurisdictions that are worried about how lockdowns have affected their tax revenue and you have a tumultuous year.

Here’s a look back at some of the year’s developments. 

First quarter: Business as usual

The year kicked off with some bold predictions of economic nexus laws continuing to change as more states were poised to enact economic nexus rules and marketplace facilitator laws started to proliferate (among them Hawaii and Illinois, with North Carolina to follow a month later).

By March, a Congressional subcommittee met to discuss how businesses were being hurt by Wayfair. The Supreme Court decision had made collecting and remitting sales tax across 10,814 jurisdictions “nightmarishly complex” and burdened “small businesses in the form of increased compliance costs and a higher probability of error when collecting taxes.”

And then the pandemic hit.

Enter the Pandemic

By spring, COVID-19 took a foothold in the country. Offices closed and suddenly employees were working from home. Bars, restaurants, hotels, retail establishments all felt the impact. Very few businesses were left unaffected. Some for the better as many online businesses have seen positive growth in 2020.

Even so, sales tax moved forward. Alaska municipalities banded together to administer local sales taxes on remote commerce in July. Georgia, Louisiana, and Michigan required marketplace facilitators to collect and remit sales tax. Predictions for sales tax revenue in states remained rosy into the rest of the year, as e-commerce was expected to represent 12% of total retail sales nationwide in 2020.

Soon after, some states began postponing sales tax filing and remittance deadlines, a relief response to business disruptions caused by a spreading pandemic. Online businesses began asking new questions: Am I in trouble if I postpone collecting and remitting sales tax? Are masks taxable? Am I going to hit new nexus thresholds with an increase in online sales?

As lockdowns spread through the spring and early summer, states proclaimed they’d get walloped on the loss of sales taxes. Billions lost, “a mess” and worse than the Great Recession of 2008-09, they predicted. By now experts were estimating that April tax collections had dropped overall in many states. Reports soon exclaimed that sales taxes in the second quarter nationwide had plummeted almost 10% compared with 2019.

Some states also began warning that employees working from home and “sheltering in place” outside the office might even create a physical nexus for businesses where they previously didn’t have one. Or could it? “Confusing” was certainly one word to describe 2020.

Individual states began reporting different stories about revenue meltdowns. Florida, for instance, reported that sales tax collections for July were $165.2 million below a January forecast – but an improvement over sales tax collections that dropped in April, May and June. Texas and Idaho reported bumps in sales tax revenue, and in Michigan a new law passed just shortly before the pandemic shutdown made it easier to collect sales tax from more online transactions.

By September, Alabama called rising pandemic-related online shopping a “life saver” for the state’s municipal governments.

End of year and a new normal

More routine sales tax developments began to be reported as states seemingly adjusted to the pandemic. Illinois announced expansion of its Audit Fast Track Resolution Program to most sales and miscellaneous tax audits. Texas declared that out-of-state wineries needed use tax permits for direct-to-consumer sales into state. Missouri clarified rules regarding sales processed outside its state, and Tennessee discussed the taxability of pre-recorded videos of online courses.

By late November, Texas and Wisconsin had joined a growing number of states confirming that online sales tax was in fact becoming a big boon to tax revenue.

As 2020 ends, is life during the pandemic returning to a little more normal, at least in terms of sales tax? Has the pandemic actually accelerated a trend started by recent holiday seasons, when online shopping started capturing a larger slice of total retail sales? (Forecasts said U.S. online sales in the last eight weeks of 2020 would hit $189 billion – nearly two years’ growth in one holiday-shopping season.)

There’s no reason to expect that online sales won’t continue to increase in every state in 2021.

As sales tax continues to become more complicated, know you have someone that can help. When you work with TaxConnex, we eliminate the burden and complexity of sales tax. Contact us to learn what it means when it’s all on us.  

Looking for additional resources on some of the topics mentioned above? Check these out: 

Wayfair: A key 2018 Supreme Court decision that set the tone for nationwide sales tax obligations. Learn more here.

Nexus: The volume of business an online company does within a state – a constantly changing figure if you do business in many states. Learn more here.

Marketplace facilitator: Laws on these are becoming a major tool for revenue-starved jurisdictions to collect taxes. Learn more here.

Audits: They could be on the rise from among the thousands of tax jurisdictions in the U.S. The responsibilities can be heavy and the penalties severe. Learn more here.

“Personnel” nexus: Does this exist (yet) and will it be a sales tax danger? Learn more here.