2023 in review: The year in sales tax

No year’s ever dull in sales tax, and the pace has only accelerated in the five years since the Supreme Court’s Wayfair decision. In 2023, familiar trends and new issues showed up across the states.

As we start the new year, here’s a look back at some significant events with this 2023 sales tax summary overview.

Sales tax holidays

Tax breaks continued to mushroom in 2023 – sales tax holidays on everything from groceries and back-to-school supplies to emergency gear and gun safes. Though widespread and seemingly popular, these holidays did begin to have their doubters.

Sales tax holidays are limited periods, frequently weeks or weekends, where a state allows sales tax to be eliminated or reduced on categories of consumer products, sometimes with conditions attached. Last summer, for instance, Puerto Rico gave a break on school uniforms and supplies; Alabama cut shoppers tax slack on school supplies, clothing and computers. In Florida, Mississippi and Tennessee, breaks depended on the price limits of items.

This year, multiple states introduced new sales tax exemptions, too. Virginia, Alabama and Kansas gave breaks on groceries. As of this fall, Ohio’s sales tax exemptions added diapers, creams and wipes, child-restraint devices or booster seats, cribs and strollers and Texas stopped collecting sales tax on baby products like diapers and wipes, as well as menstrual products.

This year’s “Framework for Freedom” budget proposal from Florida Gov. Ron DeSantis includes permanent sales tax exemptions on baby necessities like strollers and formula, as well as on over-the-counter pet meds and on gas stoves. “[Pets] are part of our families, too,” DeSantis said. “And then we just added, because I think it needs to be done, no tax permanently on gas stoves … They want your gas stove, and we’re not going to let that happen.”

Beyond politics and emotionalism, in fact, critics say sales tax holidays are “temporary moratoriums [that] are costly, poorly targeted, and do little more than allow state leaders to score political points,” said the Institute on Taxation and Economic Policy.”

“Sales tax holidays remain the same as they always have been – ineffective and inefficient,” said The Tax Foundation. Added another critic, in August, “Next week’s installment of Connecticut’s annual suspension of sales taxes on clothing and shoes may be a reminder that government is very good at bribing people with their own money.”

Retail delivery fees

On the heels of Colorado, Minnesota enacted transportation legislation that created a retail delivery fee. The 50-cent fee becomes effective July 1, 2024, and the money will generally go toward road maintenance and vehicular infrastructure, among other expenditures. The fee will also be a way to replace lost funds from gasoline taxes as electric cars become more prevalent.

Even as New York joined the bandwagon and proposed their own retail delivery fee, though, Colorado lawmakers are considering a bill to help businesses comply with what many have called that state’s “burdensome” retail delivery fee (the 27-cent fee applies to all deliveries containing at least one taxable item made by motor vehicle to a location in Colorado). Lawmakers look to simplify the requirement by exempting businesses – including retroactively to when the fee was first imposed – that have $500,000 or less in annual retail sales.

Easing nexus by transaction thresholds

The 2018 Wayfair decision quickly inspired states to set thresholds beyond which a remote seller would have to collect and remit sales tax. One threshold was the dollar volume of annual sales. The other, frequently still paired with dollar volume, was the number of sales.

In recent months, many states with the twin threshold for filing (say, $100,000 in sales or 200 transactions) have found that the costs of administration of those transaction thresholds bring little economic benefit to the state’s tax collections. States seem to have begun lowering their transaction thresholds or are becoming more open to the idea.

This year, South Dakota eliminated its 200-transaction economic nexus transaction threshold, as did Louisiana’s threshold. Louisiana also eliminated resale and wholesale transactions as factors in the $100,000 threshold for marketplace facilitators.

National sales tax

H.R.25 of the 118th Congress, the GOP’s “Fair Tax Act of 2023,” was this year’s attempt at finally creating a long-held dream of some: a national sales tax.

The instantly embattled bill seeks a national sales tax on the use or consumption in the U.S. of taxable property or services in lieu of the current income taxes, payroll taxes and estate and gift taxes. The rate of the sales tax would be 23% in 2025 and adjusted in subsequent years. Exemptions would exist for used and intangible property, property or services purchased for business, export, or investment purposes and for state government functions.

All states (including those now without a sales tax) and the District of Columbia would be responsible for administering, collecting and remitting the sales tax to the federal Treasury. Americans would get a monthly sales tax rebate based on criteria related to family size and poverty guidelines. Tax revenues would be allocated among the general federal revenue, the old-age and survivors insurance trust fund, the disability insurance trust fund, the hospital insurance trust fund and the federal supplementary medical insurance trust fund. The IRS would be abolished.

The bill, variations of which have been around for years, stands little chance, observers say, but proves that the idea of a national sales tax remains alive.

On the other hand, the “A” among the NOMAD states may soon have a real statewide sales tax. In Alaska, a Republican lawmaker recently introduced a bill that would create a 2% state sales tax as one part of a larger plan to close a revenue gap partially created by falling oil prices.

More than 100 municipalities and boroughs around the state already have a local sales tax of 1% to 7%; about half have also formed the Alaska Remote Seller Sales Tax Commission.

Revenue

The pandemic and post-pandemic online sales boom continues but may have slowed in 2023.

Texas state sales tax revenue totaled $3.57 billion in March, 5.9% more than in March 2022, and $3.99 billion in July, 2.7% more than in July 2022. New York state sales tax collections jumped 2.5% in October year-over-year. Overall, local collections in NYS also totaled nearly $1.8 billion, up $43.5 million compared to the same time in 2022.

Yet The Urban Institute reported that states’ tax revenue is sliding broadly, falling in September 2023 for the 14th straight month. Cooling economic growth, tax cuts and weak stock-market performance are big contributors to the drop in revenue.

Black Friday, Cyber Monday

Black Friday 2023 e-commerce spending jumped 7.5% from a year earlier to a record $9.8 billion in the U.S., according to an Adobe Analytics report cited by news sources. Americans spent $12.4 billion on Cyber Monday, news reports added, saying overall spending increased 9.6% from a year ago, making it the biggest online shopping day ever.

That's the 2023 sales tax summary overview. Now for 2024.

If you think your business may be impacted by sales tax developments, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more.