As communities grapple with budget shortfalls, how will online and digital taxation change?
The financial strain of COVID-19 can be felt across nearly every industry, with state governments facing massive budget shortfalls as the economic shutdown puts a damper on taxes – their main revenue source. With stay-at-home orders and fewer consumers out spending money, many states have seen a significant drop-off in sales tax revenues. Couple the reduction in sales taxes with deferred income tax payments until July and many states are in a precarious financial situation.
While taxing authorities must approach taxation carefully during a time of economic uncertainty, there are a few options that states have to start recouping lost revenue by diversifying what they tax and how things are taxed.
Online transaction taxes
More than 40 states and the District of Columbia have implemented economic nexus laws that allow the collection of sales tax on online transactions as a result of the 2018 South Dakota v. Wayfair Supreme Court decision. Under these new laws, states require online sellers to pay sales tax on sales made to customers in their states, regardless of whether the business has a physical presence in the state.
Due to social distancing measures and businesses closures, more consumers have taken to online shopping to purchase necessities and discretionary items. In fact, Avalara’s customer data found that businesses selling online experienced an increase in customer traffic, while those without online selling capabilities did not. For states with economic nexus laws already in place, they could already be benefitting from a more consistent flow of sales taxes despite the decline in physical retail sales. While many states have their thresholds set at $100,000 for economic nexus obligations, we could see some states look at lowering those thresholds to expand their revenue intake from online sales until physical sales bounce back.
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