State Taxes in 2016: It’s All About the Base

For officials seeking reelection, changing the definition of nexus to include non-voting taxpayers is more palatable than raising existing taxes on...
Jonathan BarsadeJanuary 5, 2016

With the total debt of state governments in the United States debt projected to hit $1.17 trillion in fiscal year 2016, one thing thing is certain: Ben Franklin’s famous quote, “In this world nothing can be said to be certain, except death and taxes,” will remain true.

Jonathan Barsade

Jonathan Barsade

But state politicians are in a quandary. They need to make up for huge budget deficits while avoiding raising taxes so as not to end their political careers. To resolve the issue, many are likely to expanding the number of taxpayers, thereby increasing revenue without affecting existing taxpayers. To change the spelling of one of the words in Meghan Trainor’s hit song, 2016 will be “all about that (tax) base.” CFOs can expect the following:

Creative Interpretations of Nexus. A state determines taxpayers by “nexus,” their connection to the state because of their location in that state. In 2016, state governments will continue to liberalize the definition of nexus in order to increase the number of taxpayers.

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Opinion_Bug7Twenty-seven states have already passed a so-called “Amazon Tax” law, under which virtual locations can establish nexus. For example, a California business will create New York nexus if it allows New York sellers to market items from its website.

Other states are testing the limits of this strategy. Colorado provides a good case study. In 2010, the state passed a version of the Amazon Tax with this totalitarian requirement: “Retailers that do not collect Colorado sales tax are required by law to provide the Colorado Department of Revenue with a report of the total amount of all of a purchaser’s purchases at the end of the year.”

Colorado justified this move by citing obscure and seldom-followed state law under which residents must personally report and pay taxes on all goods purchased from out-state-vendors if those vendors don’t collect the tax. Essentially, the state tried to make the reporting requirement so abhorrent that retailers would cave in and collect tax themselves. In addition to giving the state every customer’s purchase history, vendors would have to provide the residents notice about the tax on each sale and a year-end summary of transactions.

The motive isn’t hard to discern: The Denver Post reported that the state lost an estimated $172.7 million in 2012 because residents didn’t pay the out-of-state tax. Following passage of the law, Amazon cancelled its relationships with all Colorado affiliates, and the Direct Marketing Association sued the Colorado Department of Revenue. On March 3, 2015, the case reached the U.S. Supreme Court, where the justices unanimously reversed an appeals court ruling that barred the suit. The fight goes on.

Expect more states to continue testing the waters next year. For an official seeking reelection, changing the definition of nexus to include non-voting taxpayers is more palatable than raising existing taxes on voting taxpayers.

Less Tolerance for Ambiguity. With sophisticated software now available to states, their revenue departments are targeting ambiguities that some businesses used to exploit. For instance, on a sales tax filing, if you select the reason for an “Exemption” as “Other,” expect to receive a request for an explanation shortly after you submit the return. By eliminating gray zones, states believe they can increase tax revenue.

Along those lines, 2016 will be the year when we see more states eliminate the “occasional filing” frequency. Many states have laws that exempt businesses from regular filing requirements if they infrequently sell within the state. For instance, Tennessee defines “business” to exclude occasional and isolated sales, which are “…sales of tangible personal property taking place only during temporary sales periods of 30 days or less and occurring no more than twice per year.”

In other words, if you attend a trade show in Tennessee and sell some “smart” coffee makers, you don’t owe sales tax. If you attend a similar show in Idaho, you’d be required to get a temporary seller’s permit and submit an occasional filing within 15 days of the event.

Some states and local governments now either refuse occasional filings or automatically register businesses that identify as occasional filers. They send occasional filers monthly assessments even if the merchant hasn’t sold anything in state for months.

That way the states can a) charge occasional sellers a regular registration fee, b) charge penalties when occasional sellers remit late or incorrect payments, and c) make sure no sale falls through the cracks. It’s yet another way to increase the tax base without angering the people who voted you into office.

Pot and Gambling. The news from Colorado and the state of Washington: recreational cannabis increases state tax revenue. Time reported that Colorado’s tax revenue on marijuana sales was $70 million in FY 2015, topping alcohol by $28 million. Washington has generated nearly $70 million already in FY 2016 (July 1, 2015 to June 30, 2016). Oregon and Alaska will likely post impressive numbers and, in 2016, more states will likely legalize marijuana or at least entertain the idea.

The sticking point is not revenue but morality and crime. Depending on the article you consult and the date it was published, crime is either plunging or rising in Colorado. Suffice it to say that if bloggers, journalists, academics, and lobbyists can all paint such different pictures of crime, so too can policymakers. States that want the added revenue will make the crime statistics fit their preferred narrative.

States will soften their stance on a few other vices, including gambling. Yet again, the jury is out on gambling’s effect: some types of gambling institutions appear to increase tax revenue while others do not. The daily fantasy sports sites, namely DraftKings and FanDuel, are awfully appealing to state revenue departments.

Though the daily sites consider themselves “skill games” (like seasonal fantasy sports providers), their participants will spend more than $3 billion on entry frees this year. This gives states a huge incentive to reclassify daily fantasy sites as gambling. Indeed, Pennsylvania, California, Illinois, and other states have already begun working on legislation to regulate and tax DraftKings, FanDuel, and their kin.

Budget Balancing.With many state budgets deeply in the red, they don’t have a choice but to find revenue. By reinterpreting nexus, closing exemptions and converting minor vices into tax revenue generators, states will expand their tax bases without raising rates on their constituents. 2016 will be all about that base.

Jonathan Barsade is CEO of Exactor, a sales-tax-compliance software firm.