The COVID-19 pandemic has had a devastating effect on the taxation policies of local and state governments in 2020 and 2021. The lockdown rules and the introduction of social distancing regulations, such as mask mandates, have limited the growth of the economy for more than a year.
The introduction of the economic nexus has allowed many state governments to replace the funds lost to the pandemic in their general funds. Every $1 from every $5 spent on retail during the pandemic was spent online, according to Accounting Web. The growing level of online sales means the ability to collect taxes from out-of-state is important to state governments.
What is the Nexus?
The introduction of the Nexus was an important development for state governments looking to collect taxes on online sales. The collection of sales taxes was limited to companies with a physical presence in a state until the introduction of the Nexus.
A Supreme Court decision was made in favor of the State of South Dakota against the online retailer Wayfair. The Wayfair ruling eliminated the requirement for a physical presence in any state and made it easy for states to come together and collect tax revenue.
Tax Bases Will Broaden
The expansion of the tax base is one of the most commonly expected aspects of the changes in taxation in 2021. Financial experts from several banks and brokerages believe the expansion of the tax base is the only option for maintaining the current level of general taxation funds.
Online retailers have been expanding to include those who had previously been focused on brick-and-mortar locations and found their businesses in danger during the pandemic. The 2021 changes to the nexus will see some goods that are currently exempt will face taxation as state governments look to give their general fund a boost.
An excellent example of the expanding taxation for online services and products is the inclusion of the digital marketing sector in taxed services. The decision to tax digital marketing services has already been taken in New York and Maryland, with other states, expected to follow suit soon.
Marketplace Sales Will Be Taxed
Online marketplaces, such as Amazon, have walked a fine line between failing to collect taxes and keep their sellers happy. Bloomberg Tax explains state taxation agencies have quietly been working with Amazon and other marketplaces to help them remit taxes from several platforms. State taxation agencies are holding large marketplace operators responsible for collecting taxes via the nexus to bring them into line with brick-and-mortar retailers.
2021 will bring about a change in the way marketplace sellers go about their business, including the payment of past sales taxes. The economic Nexus gave state taxation agencies the right to look back for historic sales taxes that are still outstanding. In California, the state taxation agency has been looking to notify sellers using the Fulfillment by Amazon tag of their requirement to pay taxes from previous years.
Compliance Requirements
The expansion of the nexus to more than 40 states and Washington D.C. is making the need for compliance important to thousands of online retailers. Compliance has been a voluntary activity for independent retailers, but states are enforcing compliance through the use of technology. Artificial Intelligence and data mining tools have been put to work by several states to ensure information is discovered about retailers.
For state regulators, the expansion of the nexus is driving up employment as the number of auditors employed has grown. The state of Missouri has removed the lower limits on its online retailers, opening the door to more audits taking place in 2021.
Unregistered Sellers Face a Crackdown
Compliance issues have plagued the nexus since it was established. Registering for taxes has been a voluntary process in most states, with unregistered sellers not being chased for their missed taxes. Financial experts believe the crackdown on unregistered sellers will include enforcement in individual states.
In states where enforcement and compliance are an issue, unregistered sellers can expect a notice detailing the requirements to complete the repayment of past taxes.
Brexit Rears Its Head
An aspect of the U.S. economy that has not been addressed is the financial changes taking place in the European Union. The Brexit process has been a difficult one during the pandemic, with the financial implications lost in the COVID-19 crisis.
In 2021, the taxation impact of Brexit will be large, with the economic nexus needing to consider U.K. V.A.T. The difference between taxes charged in the E.U. and the U.K. will add to the confusion of tax issues facing online retailers. Brexit will have impacts far away from the border between the U.K. and the E.U.
Marijuana Taxes Will Become Important
The expansion of legalized marijuana across the U.S. will strike the online retail sector. Individual states are expanding their taxation program to meet the demands of the burgeoning marijuana industry. Regulators in states with legal marijuana sales will have to take online sales into account.
Final Thoughts
The Nexus is an important aspect of the financial landscape in every participating state. New sales issues, including legal marijuana, will bring new problems to the taxation of several states.