As state and local governments look for new ways to stimulate their economies, incentivize employment, and keep businesses afloat, the pressure for states to generate additional tax revenue continues. In response to this pressure, states are revisiting taxpayers’ compliance with their “nexus” rules and other tax policies and considering new taxes on digital services. In addition, many state governments are reconsidering the extent to which they are willing to conform to federal tax rules and legislation.
Taxpayers need to be aware of the tax rules in the states in which they operate. Taxpayers that cross state borders—even virtually—should review state nexus and other policies to understand their compliance obligations, identify ways to minimize their state tax liabilities, and eliminate any state tax exposure. The following are some of the state tax issues taxpayers should monitor and plan for in 2021:
1. Passthrough entity (PTE) income tax elections
It looks like the federal $10,000 “SALT cap” is sticking around, and more states are enacting a workaround in response. A growing number of states are allowing partnerships and S corporations to elect to be taxed at the entity level to help their resident owners get around the SALT cap. However, it is important that individuals understand the broad, long-term implications of the PTE tax election. Care needs to be exercised to avoid state tax traps, especially for nonresidents, that could exceed any federal tax savings.
2. Impacts of federal income tax changes
Federal tax legislation also has impact at the state level. While many states quickly settle on approaches to conform with or decouple from the federal legislation, other states have done nothing, leaving taxpayers to file state income tax returns with very little guidance on how or whether the federal changes apply.
Now that tax years impacted by the Tax Cuts and Jobs Act are well into their audit cycles, state taxpayers that unknowingly did not correctly take federal changes into account when calculating their state taxes may be confronted by not only audit exposure, but in some cases refund opportunities. Taxpayers should review their state tax returns to identify opportunities to minimize exposure and identify refunds well in advance of state tax audits.
3. Taxes on digital advertising services
Maryland was the first state to enact a digital advertising services tax. Large tech companies immediately sued the state, and in response the legislature passed a bill to delay the implementation of the controversial tax until 2022. To date, several other states have introduced similar digital advertising taxes, and some states are proposing to include these services in their sales tax base. States will be closely following the litigation in Maryland, as they consider their own legislation.
The definition of digital advertising services can potentially be very broad and fact specific. Taxpayers should understand the various state proposals and plan for their potential impact.
4. Sales and use tax nexus: Remote sellers and marketplaces
Florida and Kansas have finally joined the ranks of states with a bright-line economic nexus threshold for remote retailers and marketplace providers. At this point, the only state without a bright-line standard or marketplace rules is Missouri.
However, retailers should not forget about physical presence. Even though most states have implemented economic nexus rules since Wayfair, the traditional physical presence rules are still alive and well. States are continuing to assess retailers that, sometimes unknowingly, have some form of physical presence in the state.
E-retailers should be sure they are in compliance with state sales and use tax laws and marketplace facilitator rules and have considered all planning opportunities.
5. Property taxes
Assessed property tax values typically lag behind market values. If you think your property is being over-assessed compared to the fair market value of the property, then a consultation with a valuation expert can help to determine whether the property tax should be challenged.
How We Can Help
We are experienced in income, franchise, gross receipts, sales and use, and property taxes, as well as unclaimed property and credits and incentives. We can help taxpayers monitor state tax laws and nexus requirements, understand where they have state obligations and how to minimize them, identify and implement planning opportunities, identify and quantify tax exposures, and assist with state tax audits.