Discover the tax changes you need to know in 2023

Businesses will need to be adaptive and ready to respond to emerging international trends, all while keeping up with their tax compliance to thrive in 2023. Utilizing tax compliance software is essential to navigate the complexities of sales tax changes, economic uncertainty, and emerging technological trends efficiently.

That’s because significant tax changes are set to affect key industries over the next 12 months, while ongoing supply chain challenges threaten to impact tax obligations.

To stay on the right side of the law, businesses will need to know about any issues that have the potential to complicate their tax compliance over the coming year.

Let’s start by looking at sales tax because it affects a wide range of industries, including retail, manufacturing, and software. It’s also a complicated topic with many different facets that businesses need to understand.

In this article we will cover:

1. Sales tax changes
2. Economic uncertainty and ongoing supply chain challenges
3. Technological developments demand new tax policies

1. Sales tax changes

US sales tax is imposed on the ultimate consumer of a seller’s products or services and, to further complicate the situation, it’s primarily regulated at the state level.

With 46 states—each with its own tax rate—and typically thousands of sales tax rate updates every year, it’s easy to understand how businesses can become overwhelmed by the sheer volume of tax rates they need to track to stay compliant. And events like sales tax holidays only complicate matters further.

Sales Tax Holidays

Sales tax holidays are when certain normally taxable products become exempt from sales tax for a limited period of time. And while they’re great news for consumers, they present a real challenge for retailers who need to exempt qualifying sales during each tax-free period.

Add to this the fact that while some state’s sales tax holidays provide full exemptions for qualifying products, others only exempt a certain amount of the sales price—a complex and challenging situation when it comes to sales tax compliance. 

And sales tax holidays don’t just affect US retailers. They can affect any retailer—international sellers included—deemed to have sales tax nexus in a US state.

What is sales tax nexus?

Sales tax nexus is the idea that if a business has some kind of presence in a particular state, that business is bound to comply with that state’s particular sales tax laws.

There are two sales tax nexus standards:

Physical nexus

The first and oldest standard is physical nexus—a ‘boots-on-the-ground’ business presence in a state. Physical nexus is triggered by activities that include, but aren’t limited to:

• Having an employee working in the state
• Holding inventory at a third-party fulfilment logistics warehouse
• Attending trade shows in state

Economic nexus

The second standard is economic nexus. Economic nexus is a connection between a state and business when annual sales revenues and/or transaction quantities reach a threshold set by the state that requires sales tax registration.

It impacts businesses with no physical presence in a state, also known as remote sellers, who sell goods and services in that state that meet or exceed the state’s economic nexus threshold.

Different states have general economic nexus laws, economic nexus for digital product sales, and economic nexus for SaaS products.

Businesses and states are still adapting to the Wayfair case

By January 1, 2023, every state with a general sales tax will have an economic nexus law. And while all states continue to refine their remote sales tax laws in the wake of the U.S. Supreme Court’s Wayfair ruling of 2018, many businesses are struggling to keep up with the resulting tax obligations and compliance challenges.

In fact, many are failing to do everything required to be compliant with economic nexus—or to register for sales tax at all.

And for those businesses that are still trying to manage their tax compliance manually? They’re understandably having a hard time as they try to keep up with the many changes while identifying their state sales tax obligations and filing requirements.

This overwhelming situation explains why many companies are embracing tax technology in their tax functions. Adopting tax technology helps companies comply with new electronic reporting requirements and manage end-to-end tax compliance process natively in their ERP. And by automating their tax processes, businesses can save time, improve accuracy, and operate more efficiently.

Now, let’s look at some of the wider tax issues being experienced by businesses worldwide.

2. Economic uncertainty and ongoing supply chain challenges

In September 2022, North American respondents to McKinsey’s Global Survey on economic conditions cited inflation, volatile energy prices, and geopolitical instability and/or conflicts as the greatest potential risks to US economic growth over the next 12 months.

Supply chain disruptions, triggered by the pandemic and now continuing because of political instability, have compelled some businesses to seek new supply chains, which has led to new tax obligations.

A recent survey of 400 US-based senior business decision-makers in logistics and supply chain strategy, cited geopolitical unrest as the root of many supply chain disruptions, along with the lack of raw materials and rising fuel and energy costs.

In response, over half of those questioned reported that they would adopt technology to overcome challenges, implement contingency measures, prioritize US-based supply chains, and find new environmentally friendly supply chain providers. 

As a result, any or all of these actions could change or trigger new sales and use tax obligations for businesses.

Ongoing supply chain issues have also impacted sales and use tax compliance for companies who have needed to store inventory in transit as a result of significant delays.

If the state storing the inventory was one that taxes inventory in transit, the company would find itself triggering physical nexus and owing that state income tax.

“Most states with a corporate income tax view inventory as physical nexus.”

Scott Peterson, Vice President of Government Relations at Avalara

Now, from the global stage we can look into the future and explore the implications of the metaverse and cryptocurrencies.

3. Technological developments demand new tax policies

There’s no doubt that developments in the tech sector are changing the tax landscape of the future for US companies.

Today, software and communications companies are busy dealing with the rate of accelerated digital transformations resulting from the pandemic—and the increased focus on how such sales are sourced and taxed.

Elsewhere, the view in the technology sector is expanding into virtual worlds.

In 2022, departments of revenue in certain states addressed the question, ‘How does sales tax apply to NFT transactions?’ The future is already here.

The metaverse, non-fungible tokens, cryptocurrencies, and virtual world transactions are already impacting existing state tax laws and policies.

And while businesses are trying to adapt and keep up with the impact of this fast-moving technological change, states are trying to make sense of these new developments and work out if and how their existing tax laws apply—or whether they need to develop new policies.

So, as we come back to earth and look to 2023, what’s on the horizon for businesses across the US in terms of the key issues potentially complicating their tax compliance?

Join us for Tax Changes You Need to Know 2023

The world of tax legislation is ever-changing. Emerging international and technological trends, geopolitical instability, and inflation aside—businesses have a duty of care to keep up with their tax compliance and on top of emerging tax legislation changes, which is no easy feat.

Learn about the latest report from our valued partner Avalara

The tax experts at our valued partner, Avalara, have compiled a comprehensive report, Avalara Tax Changes 2023, to help.

Following a year filled with supply chain snags, inflation, and a lingering economic downturn the report explores the most significant tax trends of 2023 and reveals the most influential tax legislation set to go into effect this year—plus other changes still to come.

Tax Changes 2023 Webcast

Attend our webinar with Avalara on Wednesday, January 25th where Scott Peterson, Vice President of Tax Policy and Government Relations at Avalara will cover:

• The most significant sales tax changes
• Emerging international trends
• Digitization of global tax compliance 
• The impact of inflation 
• Tax trends for 2023 and beyond 

Attendees will also gain insights into those tax changes that will affect key industries, like manufacturing, distribution, software, and retail.