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COVID-19 eCommerce

States need revenue. Here’s what that means for your sales tax compliance.

by Sarah Craig

While the long-term economic impact of COVID-19 is a bit unknown, states across the country are grappling with an immediate and huge decrease in sales tax revenue. Regardless of how heavily states rely on sales tax revenues, they’ll be looking at ways to make up the balance sheet deficit. Sales tax is one of their most immediate sources of revenue to do just that.  

It’s important for businesses like yours to be prepared for how states plan to leverage sales tax to recoup that loss in revenue. Let’s dig in. 

The State-Level Economic Impact of COVID-19 

According to the Tax Policy Center, in May, state sales tax receipts diminished by nearly $6 billion, compared to May 2019. The culprit? There’s more than one: Lockdown orders, businesses closures, a shift to e-commerce, and state sales tax filing and payment deadline extensions.  

Data from the Urban Institute paints an even uglier picture. In 27 states, tax revenues are expected to fall $34 billion short of pre-COVID-19 forecasts in 2020. Unfortunately, the bad news doesn’t stop there. Early forecasts for 2021 show states will fall $80 billion short of projected revenue. Now for the full picture: based on the data gleaned from these 27 states, experts are expecting the total tax revenue deficit to be around $75 billion in 2020 and $125 billion in 2021. That’s a tough pill to swallow.

In addition, some states depend on sales tax revenue more than others and might institute some immediate measures to make up for the loss in revenue. This map from the Institute of Taxation and Economic Policy gives clear insight into which states rely most heavily (and least heavily!) on sales tax revenue.

States are going to look to recoup all that they can and seek new sources in order to continue to provide essential services funded by sales tax revenue. Revenue generated from sales tax goes on to fund schools, infrastructure repairs, support community programs, etc. In order for those essential programs to continue to operate, the state needs funding.

States increase sales tax scrutiny 

One way for states to balance their budgets and continue to provide essential services is to enforce sales tax compliance, especially when it comes to remote sellers. Due to COVID-19 safety concerns, we’ve seen consumers shift from in-store shopping to online spending. In turn, businesses moving to a more eCommerce-focused business model are facing new sales tax implications as they reach economic nexus in new states for the first time.

So what does all this mean? State tax authorities could spend more time on ensuring businesses are collecting and remitting the correct amount of sales tax. This could come in the form of audits, fines, or those dreaded letters from the state alerting businesses they have reached nexus and now owe sales tax. In short, now is not the time to be out of compliance. 

And, what does this mean for your business? Two things. 

One, you may need to register for a sales tax permit. Given how overloaded government offices are right now, we recommend allowing yourself extra time to get all the necessary steps completed. In addition, now may be the time to invest in using a sales tax software solution like TaxJar that lets businesses know when they’ve reached nexus in a new state. 

And two, if you’ve met economic nexus and the product is taxable, you are required to collect and remit sales tax in that state. Now is the time to integrate sales tax calculations into your online shopping experience and leverage technology to compile your sales tax reports. That’s where TaxJar comes in. The TaxJar API allows you to connect with your eCommerce platforms, marketplaces, and carts in minutes and generate precise sales tax rates and calculations at the state, county, city and special taxing district level in real time. 

States Pull New Levers: Sales Tax Categories and Policies

Another way states could try and make up some of the lost revenue is by making changes to what types of goods and services are subject to sales tax. For example, in some states, video conferencing tools (that we are all used to by now), are not subject to sales tax. As a whole, there are currently a group of states that don’t tax SaaS products, like video conferencing, or digital goods. Some sales tax experts believe that this is an antiquated system, the result of states not catching up to the digital age. As the demand for these types of products increases, state tax authorities could look at this as an opportunity to increase sales tax revenue by implementing a sales tax on those tools or services.

Another example is grocery items. In most states, grocery items are exempt from sales tax. Some sales tax experts argue that states could remove these exemptions to increase sales tax revenue. While the sales tax on grocery items could be deemed harmful to the consumer, they provide helpful funding to essential  programs like schools and infrastructure repairs that the consumer then benefits from.

How TaxJar Can Help 

While a lot may change, one thing will always stay the same: TaxJar can help you get compliant and stay compliant. We keep our finger on the pulse of sales tax news and updates so we can ensure sales tax rate accuracy and timely filing.

From automation tools like AutoFile to the TaxJar API to our award-winning customer support team, TaxJar can help you effortlessly adjust to any state-level changes that may come. Sign up for our free trial and get prepared today.  

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