Time to Bid 2020 Goodbye – Finally!
What a delight it is to write about 2021 and bid farewell to 2020. But, beware: while no one is
likely sad to see 2020 go, what 2021 has in store on the state and local tax front is not for the
faint of heart. The current crisis affects nearly every meaningful source of state and local
revenue. In 2021, corporate America, in particular, should brace for aggressive enforcement,
expansion of the tax base at every turn, and strict application of new taxes. No state or local tax
type is off the table or subject to reprieve.
Nearly all state and local governments are grappling with hits to tax collections and budget
deficits due to the COVID-19 pandemic. Taxpayers can expect a much tougher enforcement
environment as state and local governments work to increase collections and dig out of deficits.
Like the last recession, companies are likely to see an increase in audits and nexus questionnaires
as new sources for money are eyed by states. While Wayfair-type enforcement may have lagged
through 2020 due to COVID, that is not likely to be the case in 2021. Missing or late
registrations and violations of Wayfair thresholds are likely to trigger audits. Taxpayers should
closely examine why they are filing in some states and not others, and work with tax
practitioners to minimize the consequences of post-pandemic enforcement efforts.
Taxpayers can also expect revenue agencies to double down in their efforts to protect the state’s
financial state of being in pending audits and appeals. We are already seeing this happen across
the board in our matters. Pre-COVID cases set to amicably resolve have turned on end for a
“second look” by the revenue agencies. Some administrators have even commented off the
record that their agencies have been asked by the governor’s office and state legislatures to be
extra mindful of the state’s position and make sure there has been a thorough review of the
merits.
Taxpayers should anticipate even more aggressive pursuit by states and localities to broaden the
tax base. Between shelter-in-place, social distancing, and mandatory business closures that wane
on even now, sales tax revenue is easily one of the hardest hit tax revenues. That does not mean
consumption has stopped. The biggest marketplace retailers have reported greater than expected
revenues the second and third quarters of 2020, suggesting consumption is not only expected to
return to pre-COVID levels but to exceed pre-COVID levels. Changes to income tax revenue are
often too unpredictive, but an across the board increase to sales tax will make it a focal point of
government interest. As a result, states are likely to prioritize expansion of the sales tax base
during recovery.
While not a result of the coronavirus outbreak, states are likely to double their efforts to
accelerate collection of sales tax on digital goods and services, digital marketing, the gig
economy and other sources that were previously not taxable or were on the cusp of what is
considered a taxable sale in a given jurisdiction. Taxpayers also need to better understand
customer uses of their products and services. States and localities are growing impatient with
taxpayer responses that they do not know how or where customers use their products or services.
These are issues that have grown in significance when it comes to nexus and sales sourcing.
Taxpayers should expect sales tax increases.
Tangential to the enforcement front is the slew of new taxes ushered in during 2020 that
taxpayers must discern the extent of application and plan appropriately. Take for example San
Francisco. In November, voters overwhelmingly approved a slew of tax-related measures:
Proposition F, which overhauls San Francisco’s business taxes; Proposition I, which doubles the
real estate transfer tax on transactions exceeding $10 million; Proposition L, which institutes an
aggressive new “Overpaid Executive Gross Receipts Tax;” and Proposition J, which repeals and
replaces an annual parcel tax. Voters were not the only ones to pass new local taxes in 2020—
plenty of localities passed new taxes, too. For instance, the Seattle City Council passed a new
payroll tax that will levy companies with more than $7 million in payroll expenses starting in
2021. The new plan is estimated to raise $200 million per year for Seattle. Unlike the
controversial head tax approved and repealed a month later by the Seattle City Council in 2018,
the new tax does not impose a per-employee levy on the number of employees at big companies
(defined then as businesses taking in over $20 million in revenue); instead, approximately 800
employers with “high” payrolls will face taxes on the salaries of employees making at least
$150,000 per year. Taxpayers should work with their tax practitioners to careful examine new
taxes and determine the extent to which they apply and whether operations can be restructured to
minimize the impact.
2021 will be a force to be reckoned with on the state and local tax front, but let us hope it pales
in comparison to 2020’s coronavirus pandemic.
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