2024 sales tax trends and updates
by December 1, 2023
Sales tax legislation is always changing, and this year was no exception. Many states changed how certain goods and services were taxed, altered sales tax rates, and even changed economic nexus threshold requirements.
It’s important to be aware of trends that could impact your compliance strategy in the new year. To bring you the most important compliance trends, we partnered with the Stripe Tax team (Stripe acquired TaxJar in 2021) to create a comprehensive rundown on global tax trends like mandatory e-invoicing requirements in Europe and inflation related rate changes across multiple countries.
We’ve summarized a few top sales tax trends in the US below, but if you are considering expanding outside of the US, we recommend checking out the comprehensive global tax trends guide to understand how to navigate tax compliance in other countries.
- Changes in existing sales tax legislation
In 2023, both Louisiana and South Dakota removed the 200 transaction requirement from the economic nexus threshold, streamlining compliance requirements for small sellers. In addition, states might begin to change their position on taxing certain digital services. For example, in July 2023, Michigan clarified that it will tax cloud computing as prewritten software if there is a downloadable component. We believe there will continue to be more changes on how software is taxed in the future as states determine how to manage digital goods taxability going forward.
- Ongoing challenges for marketplace facilitators
While marketplace facilitator laws are the new norm, it continues to be challenging for marketplaces to determine their obligations. This is because no single definition exists for “marketplace facilitator” with definitions varying among state tax laws. In addition, many states still do not provide guidance on marketplace facilitator rules in the sharing economy (short-term rental platforms, ride-sharing services, and food delivery platforms). Finally, many states and local jurisdictions have expanded collection and remittance requirements for marketplace facilitators beyond sales tax. It’s more important than ever for businesses to keep accurate records to determine which sales they are required to collect taxes on.
- Tax simplification measures
One reason tax compliance is so complex is because of home rule states. Home rule states allow individual home rule cities to administer their own sales taxes as well as define their own tax bases. These cities can define their own tax rules and sellers may be required to complete additional registrations in these areas. The following are home rule states: Alabama, Alaska, Arizona, Colorado, and Louisiana. Businesses often have to file multiple returns in each home rule state, which can be cumbersome.
However, we’ve seen a few states take the first step to simplify tax compliance for these sellers. For example, Colorado has a Sales and Use Tax Simplification Task Force that is charged with studying the components of a simplified sales tax system and the benefits it would create for sellers. Louisiana is also working towards simplification by considering a centralized return, combining both state and local (home rule) returns into one return. We expect to see home rule states put more effort into simplifying this for businesses going forward.
- New tax types and sales tax holidays
In addition to home rule states, there are often multiple tax types for businesses to manage. For example, many states introduced a retail delivery fee. The Colorado retail delivery fee applies to all deliveries made to a location in Colorado where at least one tangible personal property item is subject to sales tax. Now, businesses are left managing sales tax in addition to these delivery fees. Both New York and Minnesota have introduced their own retail delivery fee in 2023, although Minnesota’s doesn’t go into effect until January 2024. Another example is the Chicago Lease Tax (Personal Property Lease Transaction Tax). This tax applies to remote sellers including SaaS companies and digital goods sellers, whose sales into Chicago exceed the threshold of $100,000. This is in addition to any sales tax requirements in the city. In addition to these tax types, businesses selling globally have to contend with other country specific taxes like VAT or GST.
We’ve also seen a trend of states introducing more sales tax holidays than we’ve seen in the past, likely driven by inflation and economic uncertainty. Sales tax holidays are created to drive retail spending by providing days where consumers can make purchases without paying sales tax. Back-to-school shopping and weather emergency preparedness are popular types of sales tax holidays. However, these types of holidays are not always straightforward. For example, in Tennessee, there is a grocery sales tax holiday that temporarily exempts grocery items from sales tax for a three month period. In Texas, there is a water efficiency sales tax holiday that exempts sales tax on purchases that try to eliminate water waste.
Keeping up with set holidays and what is exempt is challenging enough. On top of that is the fact that most states don’t announce holidays very far in advance. In some states, businesses are required to honor sales tax holidays. This is why many businesses turn to a sales tax automation solution, like TaxJar. With these types of solutions, companies don’t have to manually stay on top of these holidays, and can let the tax engine apply sales tax exemptions when necessary. Learn more about TaxJar and how a sales tax solution can help your business here.
Prepare for the year ahead
Sales tax moves quickly, so trying to keep up with the changing laws and trends can be daunting. The TaxJar blog is a great resource to stay updated on new changes and trends in e-commerce. You’ll find resources on the steps to compliance, and how to prepare for the year ahead. Don’t forget to check out the Global Tax Compliance: 2024 Tax Trends and Changes report from Stripe.
