Tax Changes 2023: Key Compliance Concerns Facing Businesses Today

The world is too big, tax too complex, and attention spans too short for one report to cover everything going on in tax compliance today. That doesn’t stop us from trying.

As in past years, Avalara has compiled it’s list of key issues complicating tax compliance for businesses. The Avalara Tax Changes 2023 report, which will be published in January, includes non-income tax types, including sales and use tax because it affects so many industries: beverage alcohol, lodging, manufacturing, retail, and software. It also delves into communications tax, and excise tax in the energy and tobacco/vape sectors. Finally, it looks beyond U.S. borders to explore what’s happening with tax in other countries — and what that means for cross-border businesses.

Thousands of tax jurisdictions, thousands of rate changes

There are more than 13,000 sales and use tax jurisdictions in the United States, and rates in each jurisdiction are subject to change as new taxes are adopted or old ones expire. Rates go up to fund new projects or drop to give taxpayers a break. There are typically thousands of sales tax rate updates every year.

The way specific products are taxed is also subject to change for a variety of reasons, including sales tax holidays. There were close to 50 sales tax holidays in 23 states (plus Puerto Rico) in 2022. Florida alone established about 10 new tax-free periods, some lasting less than a week, others lasting two years. Since some of Florida’s 2022 sales tax holidays provided full exemptions for qualifying products and some exempted only a certain amount of the sales price (e.g., the first $300 of the sales price of paddleboards), compliance was a nightmare for affected retailers.  And thanks to the rise of ecommerce and online sales tax requirements, tax-free weeks and weekends often affect out-of-state sellers.

Sales tax holidays aren’t the only source of tax changes. For example, residential energy is exempt from local sales and use tax in Rockland County, New York, effective December 1, 2022 (it’s already exempt from state sales tax). An exemption for children’s diapers took effect in Indiana on September 1, 2022, and in New York on December 1, 2022[1] [2] ; diapers and feminine hygiene products are exempt from sales tax in Colorado and Iowa starting January 1, 2023. No wonder 48% of participants in a 2021 Avalara/Potentiate survey identified sales tax rate or rule errors as a top cause of audit penalties.

Whatever causes them and no matter how great the burden, rate changes are just the tip of the compliance iceberg. New tech developments tend to spark new tax policies that need to be digested and incorporated into business procedures.

New technology calls for new tax policies

Take cryptocurrency, non-fungible tokens (NFTs), and the metaverse. Your business may not have anything to do with these today, but there’s a good chance you’ll engage with at least one of them tomorrow. Some experts predict everyone will be using the metaverse in some form or another within five years.

Of course, you never know. There’s a lot of enthusiasm around crypto, NFTs, and the metaverse, but there’s also a lot of volatility. Meta (formerly Facebook) experienced a significant drop in revenue after changing its business model to focus on the metaverse, and several cryptocurrencies have folded since Bitcoin peaked in November 2021. And while some NFT originals have sold for millions, loads of people still couldn’t tell you what an NFT is.

States are also trying to make sense of such new developments. They need to figure out whether and how existing tax laws apply to crypto, NFTs, and transactions occurring in virtual worlds, or if new tax policies need to be developed. In 2022, departments of revenue in Pennsylvania, Puerto Rico, Washington, and Wisconsin addressed how sales tax applies to NFT transactions.

Avalara Senior Director of North America Tax Content David Lingerfelt believes these technologies could trigger the next Wayfair moment in indirect tax. He’s referring to South Dakota v. Wayfair, Inc. (June 21, 2018), the U.S. Supreme Court decision that freed states to tax out-of-state sales and unleashed an avalanche of lawsuits, legislation, and new tax requirements for businesses.

Meanwhile, the original Wayfair moment is still happening. States continue to refine their remote sales tax laws and businesses still grapple with the resulting compliance challenges.

Businesses and states still adapting to Wayfair

Prior to the Wayfair decision, states were largely limited to taxing businesses with a physical presence in the state. Physical presence still establishes a sales tax obligation, but post Wayfair, states can also base a sales tax obligation on a remote seller’s economic activity in the state (i.e., economic nexus).

Hawaii, Maine, and Vermont began enforcing economic nexus laws on July 1, 2018, almost immediately after the court issued its ruling. Come January 1, 2023, when Missouri finally jumps on the remote sales tax wagon, every state with a general sales tax will have an economic nexus law as well as a marketplace law that makes marketplace facilitators responsible for the tax due on third-party sales.

If anything, Wayfair’s impact seems to be growing over time. In a May 2022 survey conducted by NetReflector/Potentiate for Avalara, 83% of respondents said Wayfair impacted how their company conducts business. That was the highest percentage over the six survey periods (December 2019, January 2020, March 2020, December 2020, February 2022, and May 2022).

Survey finds many businesses aren’t registered as required

Despite having years to prepare and adjust to new requirements, many businesses don’t believe they’ve done all it takes to be compliant with economic nexus and marketplace facilitator laws. In fact, only 46% of respondents in May 2022 said they’d made all the changes necessary to comply with Wayfair; 38% said they’d done what it takes to comply with marketplace facilitator laws — an all-time low.

Businesses that manage compliance manually are having an especially hard time.

Sales and use tax compliance costs

Small businesses (between 20 and 499 employees) that manage compliance activities manually estimate spending $1,740 per month identifying state sales tax obligations and filing requirements. On top of that, they generally spend:

• $3,493 per month on tax rates and calculations
• $3,409 per month on exemption certificate management
• $4,894 per month on tax returns

That doesn’t include time or money spent handling audits, and 14% of all respondents claimed to have had a sales tax audit within the past five years. 

Audits happen

The Inflation Reduction Act of 2022 provides nearly $80 billion in additional funding to the Internal Revenue Service and related agencies “to bolster taxpayer services and enforcement of the tax code, among other purposes.” More than $45 billion is earmarked for tax enforcement activities like hiring more enforcement agents, providing legal support, and investing in investigative technology.

While the IRS doesn’t oversee state-level taxes like sales and use tax, there could be a trickle-down effect. As the Missouri Department of Revenue explains, “A sales tax auditor will examine your federal income tax return to reconcile the gross sales between the federal return, the sales tax return, and the sales recorded in your accounting records.” This is common practice in all states.

States take sales tax audits seriously because sales and use tax revenue accounts for about one-third of state tax revenue, so businesses need to do all they can to be in compliance. That’s especially true today, when it seems anything can happen.

Turbulent times can complicate tax compliance

Economic uncertainty tends to make people jumpy, and there’s plenty of uncertainty in the air.

For example, though the supply chain isn’t as jammed as it was during the early days of the COVID-19 pandemic, it’s not out of deep water yet. According to a recent survey of 400 U.S.-based senior business decision-makers in logistics and supply chain strategy:

• 52% of respondents think their supply chain still needs much improvement
• 49% expect supply chain issues to last through the end of 2022
• One in three believes supply chain issues will last until the end of summer 2023

Respondents cited geopolitical unrest as the root of many supply chain disruptions, along with the lack of raw materials and rising fuel and energy costs. To overcome supply chain challenges, survey participants from all industries said they plan to:

• Adopt new technology to overcome challenges (74%)
• Implement new contingency measures (67%)
• Prioritize U.S.-based supply chain solutions (60%)
• Find new environmentally friendly supply chain solutions (58%)

Any or all of these actions could change or trigger new sales and use tax obligations for businesses.

The list of changes goes on and on

This blog post gives you just a taste of what you’ll find in the Avalara 2023 Tax Changes report. You’ll have to read the full report to discover more about:

• Ad-based streaming services
• Colorado’s groundbreaking retail delivery fee
• Expanding electronic invoicing requirements
• Funds for the Superfund
• Local tax battles in Texas
• Restrictions on flavored vaping products
• Tied-house laws for beverage alcohol businesses
• And so on, and so on

Avalara Tax Changes 2023 will be available in early January. Between now and then you can register for the December 15, 2022, webinar on 2023 tax changes, during which Scott Peterson, VP of Government Relations at Avalara, and Nichol MacDonald, VP of Compliance Operations at Avalara, will discuss key policies and trends. Register now.