Scott Peterson is the VP of U.S. tax policy and government relations at Avalara. He was the first executive director of the Streamlined Sales Tax Governing Board. For seven years, Scott acted as the chief operating officer of an organization devoted to making sales tax simpler and more uniform for the benefit of business. Scott also spent 10 years as director of the South Dakota Sales Tax Division and 12 years providing research and legal writing for the South Dakota Legislature. He’s now Avalara’s go-to resource for all things related to tax policy.
Tax authorities in the US have been on a rollercoaster ride the past few years. Early in the pandemic, authorities extended significant tax relief measures as shutdowns and closures sent ripple effects across the economy. Despite months of economic uncertainty for state and local budgets, many governments across the US find themselves in a much brighter spot today than before the pandemic. As 2022 gets into full swing, the year is shaping up to be one that continues to be dynamic when it comes to tax policy.
Here are some of the trends and predictions likely to define US tax in 2022.
Online taxes will remain top of mind for tax authorities and create more complexity for sellers
In 2021, economic nexus and marketplace facilitator laws became the norm across the US with Florida and Missouri becoming the last sales tax states to adopt the measures. These laws allow states to impose an obligation on remote sellers and marketplaces to collect and remit sales tax for transactions that take place in their jurisdiction.
In 2022, online sales tax laws will come center stage for many tax authorities due to budget surpluses and cuts in other areas of tax. California is just one example of a state with a substantial budget surplus – reaching $31 billion USD. As a result of these higher-than-expected budgets, many states are making sweeping changes to their tax infrastructure. North Carolina is moving to phase out its corporate income tax, while Arkansas is planning significant cuts to its income tax rate. It’s likely that we will continue to see states move to reduce many other taxes, which will increase their reliance on sales taxes.
As the reliance on sales tax grows, businesses should brace for an increased focus on sales tax and an associated uptick in enforcement. Economic nexus laws have created lucrative revenue streams for governments, so as the focus shifts to sales tax, remote sellers will be the first stop for any increased enforcement. Along with a renewed focus, states may also see remote seller laws as evergreen fields for added tax revenue. A 2021 survey of businesses found that only 31% of small businesses believe they are fully compliant with remote seller laws. The combination of lagging compliance and increased focus will likely create a perfect storm for compliance challenges for businesses in 2022.
With widespread adoption of remote seller laws, the complexity for sellers has reached an all-time high. The high level of complexity is partly because every state can define their own rules when it comes to what triggers an obligation to collect tax. For example, Alabama’s economic nexus law requires a seller to meet or exceed $250,000 USD in sales to trigger an obligation. Meanwhile, South Dakota’s law states that a seller has an obligation when they hit $100,000 USD in sales or 200 transactions in the state.
There are several other factors that make remote seller laws complex for businesses, including the fact that states with no sales tax can still tax remote sales. Alaska has no statewide sales tax, however, nearly 40 local districts enforce economic nexus.
Because more sales are taking place digitally, the likelihood of a business triggering remote seller obligations will only continue to grow. The complexity of these laws, lack of compliance, and renewed focus by tax authorities will bring challenges front and center for businesses.
US tax authorities will feel the workforce pinch and need to turn to technology
Despite optimistic news on the budget front, many US governments will feel the sting of the workforce shortage. This means that many will have to make tough decisions around raising wages to fill positions or look into alternative options, including outsourcing roles, removing roles, or automating using technology.
As the workforce pinch closes in on tax departments, there are numerous benefits that technology can provide. For example, the technology and tax knowledge used by the private sector to manage tax compliance could easily be converted by tax departments to create taxpayer self-service education. Utilizing this resource would allow department employees to focus on higher value responsibilities. Similarly, programs like the Streamlined Sales and Use Tax Agreement could help departments spend less time and money on audits due to the use of technology partners as the source of truth for tax remittance.
In addition to offsetting labor shortages, technology could also help US tax authorities’ future proof their operations. The pandemic brought many government functions to a stop, especially paper-based functions like tax collections in states and localities. To effectively future proof their processes, tax departments should embrace that technology that will ease interoperability and allow for the seamless exchange of data, that creates the ability to work securely in a real-time environment, and that scales from a single operator to large, enterprise businesses. A successful effort will be technology that creates trust and closes the gap between government and businesses.
2022 will be another year of continued change in the world of tax across the US. For tax authorities, this will likely be an opportune time to make investments for the future of their operations. For businesses, preparing for increased complexity and enforcement should be top of mind. At the end of the day, success on both sides of the tax coin will hinge on how technology is being used to streamline and simplify tax management.