US state tax: Another business cost of COVID-19?

Projections indicate the pandemic will cause a $160 billion decrease in US state tax revenue from 2019 to 2021.^[1] To make up for this shortfall, states will likely turn to state tax rate increases as well as increased enforcement of sales tax laws. This could cause states to get aggressive when it comes to collection and compliance and result in an increase in audit activity or questions from the various state bodies about a business’s activity in the state. Some states might even go as far as estimating liabilities with very little taxpayer information, which could result in a lengthy back-and-forth between the taxpayer and the state.

In the past, the general rule with respect to sales tax applicability was that no physical presence meant no need to charge and collect sales taxes on sales of property to customers in that particular state. These rules underwent a major change two years ago when, on June 21, 2018, the United States Supreme Court issued a game changing ruling in South Dakota vs. Wayfair. This ruling eliminated the need for businesses to have a physical presence in a state to charge sales tax. This decision allowed South Dakota to impose sales tax collection requirements on Wayfair and other remote sellers based on their level of sales in the state or the number of transactions with customers in the state.

In the two years that have passed since the Wayfair ruling, almost all the states that impose a sales tax (except for Florida and Missouri) have adopted their own “Wayfair” economic nexus provisions, making these sales tax impositions the new normal. Businesses that have as little as $100,000 in annual sales or 200 transactions in a state may be required to collect sales taxes and remit them to state authorities on a monthly, quarterly or annual basis.

States typically turn to tax collection in times of economic downturn and COVID-19 likely will not be an exception. In fact, during these unprecedented times, states may even look beyond sales tax for tax revenue. As they look for revenue generation ideas, some states and localities may not be afraid of expanding their reach, by taxing new products or services such as online entertainment (as Chicago has done) or lowering the thresholds for income tax nexus.

It’s important to recognize that states can be persistent when it comes to detecting a lack of compliance and chasing unpaid taxes. Canadian businesses selling into the United States need to be aware of these circumstances and take proactive steps to mitigate their US state tax exposure.  Many states also offer voluntary disclosure programs for taxpayers with a prior period liability that wish to become compliant. Our team at Grant Thornton is monitoring developments in US state tax and how they could impact Canadian businesses that sell to the US and can assist with determination of state liabilities. 

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