COVID-19 has hit every manufacturer differently. We’ve seen businesses pivot, move to a remote workforce, shift focus to online sales, build new products and enter new markets.
If you are a Canadian manufacturer selling in the U.S., you have probably also noticed state and local governments south of the border changing too. From tax rate reductions that provide relief to economically stricken businesses, industries and sectors; to new taxes levied on services like digital advertising and remote employees; it is difficult to keep up with all the changes.
Compliance with these tax changes is not optional. It is up to each individual business to determine which changes apply to them. And this can be tricky, especially when tax law shifts quickly – and often.
Let’s have a look at the changes you should be aware of.
6 ways U.S. states may recoup lost tax revenue
As COVID-19 changes the way manufacturers do business, it also changes the amount of tax that states collect. Business closures and high unemployment have resulted in lost tax revenue, leaving many state-level governments grappling with deficits that are likely to exceed $500 billion over the next two years.
One important change is the introduction and strengthening of economic nexus laws, which levy taxes based on a commercial connection to a specific state, rather than a physical presence. In a recent webinar, Ronny Fritz, Product Solutions Engineer with Avalara, shared a few other changes you should be aware of:
1) Broadening the tax base to include more goods and services
We’re already seeing a growing trend in many states toward taxing products and services that previously have been tax-exempt, either by expanding what goods and services can be taxed or by recategorizing products so that they’re taxable. Though expanding sales tax is administratively simple for states to implement, it can be a hard sell, with varying degrees of success. Wyoming, for example, tried to introduce new taxes on groceries, only to have it voted down.
2) Identifying unregistered remote sellers
Even if you don’t have a brick-and-mortar location in a particular state, you could still owe sales tax if you meet certain economic nexus thresholds. While the exact parameters vary from state to state – they could include, for example, total taxable sales, number of transactions or even number of total retail locations – if you ship to a state, have remote employees there or even store inventory, you could be on the hook even if you aren’t doing taxable sales there. Things get more complex if you do business in multiple states because you could find yourself registering and collecting sales tax in each one.
3) Passing marketplace facilitation laws
Essentially, marketplace facilitation laws put the onus on marketplaces like Amazon to either directly pay sales taxes or collect them from sellers and provide them to the state. More than 40 states have enacted such laws, and more may be coming. Similar to economic nexus laws, these marketplaces don’t need to have a physical presence to owe sales taxes under a jurisdiction – they simply need to meet a threshold. And if your product is stored in a marketplace warehouse in a state, that could also count as economic nexus.
4) Increasing scrutiny on consumer use tax
In cases where there is no sales tax applied, a “use tax” could be levied by a state on products or services that are stored or consumed there if you operate in a different tax jurisdiction. Common triggers include inventory transfers, promotional giveaways and withdrawing inventory for external use, such as distributing laptops to different locations. “Use tax” discrepancies are easy for auditors to find, so states looking to boost their revenue are increasing scrutiny of this low-hanging fruit.
5) Florida and Missouri may adopt economic nexus laws
As we write this article, only two states have not implemented economic nexus laws: Florida and Missouri. In Florida’s case, changes are coming; as of July 1, 2021, companies with a sales volume at or exceeding $100,000 (not including exempt sales and services) in the previous calendar year will owe sales tax to the state if they do business there, with or without a physical presence. Missouri is the only hold-out, though there is a House bill before the legislature that could change that.
6) Pursuing new tax potential from remote employees
In the aftermath of COVID-19, many businesses are saying they won’t go back to the old, in-office way of working. In their new remote teams, existing employees can work in many locations – and businesses can hire from any location as well. But it’s important to consider that remote employees provide physical nexus in their jurisdiction, meaning you have a tax obligation wherever they are working. A lot of states have hit “pause” on making decisions during COVID-19, but we are already seeing some states announce that remote employees qualify as nexus.
Other sales tax changes
In addition to these six methods to increase tax revenue, we’ve seen two major changes in sales tax:
- Taxation on digital goods and services: Most sales tax requirements center around tangible, physical goods. But this is increasingly being replaced by digital delivery such as downloads, live streaming and on-demand goods and services, and some states are looking at ways tax these.
- Global value-added tax relief: During COVID, many governments around the world, to support their economies, made the decision to cut taxes or postpone collecting VAT, while providing extended terms for submitting tax revenue.
What U.S. tax changes mean for Canadian manufacturers
Your business changes fast, and the pandemic probably accelerated that. Manufacturers shifted focus to new markets and new customers – think clothing manufacturers shifting to masks and personal protective equipment, breweries producing hand sanitizer and car manufacturers building ventilators.
But those new products, markets, and customers could trigger new tax obligations in new jurisdictions; obligations that could change as states recategorize products and services. That’s why it’s so important for manufacturers – especially manufacturers that have pivoted – to closely track exemptions, economic nexus thresholds and ongoing legislative changes. But that is no easy feat – keeping up with the latest tax laws in up to 50 states is both time-consuming and mind-bogglingly complex, and hiring a professional to do it for you is costly. But noncompliance is also costly.
Retail and eCommerce have also changed significantly, with the pandemic accelerating eCommerce growth by five years. In the third quarter of 2020, consumers spent $199.44 billion with U.S. retailers. These increases in online sales can trigger sales tax obligations through economic nexus. This is especially important for international sellers, who may be reaching those thresholds for the first time, in more than one jurisdiction.
Simplify tax compliance with technology
So how do you keep up with the changes in the taxes you must collect, in each state where you sell? That’s where tax compliance automation software, such as Avalara, can help.
Avalara complements your ERP system. The ERP tracks the data through your quote to sale to payment process, and Avalara uses this data to automatically calculate the taxes – even if you’re selling in every state. No maintenance is required by you. Avalara can also help when you need to contact clients to collect and apply exemption certificates on your sales.
Your business made unprecedented changes due to the pandemic: new products, markets, and customers. It is critical to also ensure that you are compliant with the related tax regulations.
Want to know more about these tax changes? Check out this webinar.
