State government debt is expected to reach $1.17 trillion in fiscal year 2016, but elected officials have no interest in raising tax rates or taking austerity measures. Why commit political suicide when there are creative ways to boost tax revenue without angering voting taxpayers?
Instead, states will use three tools to expand their taxpayer base: pot, opacity and sufficient presence. Here is how the sales tax landscape may change in 2016:
For states that need a quick hit of tax revenue, legalizing marijuana will do the trick. In FY 2015-16, Colorado has already generated nearly $60 million in cannabis taxes, licenses and fees (as of October). Washington claims the marijuana tax obligation for FY 2015-16 is beyond $72 million counting December sales.
Oregon and Alaska recently joined the legalization club, and more states will likely follow, depending on how their residents view the moral, societal and health implications of the drug. A “gateway drug” in some circles, a minor vice in others, marijuana is mired in myth. Indeed, bloggers, journalists, academics and lobbyists can’t even agree on whether the drug increase or lowers crime rates. That means revenue-hungry states have a lot of yarn with which to spin the case for legalization.
For states that need even more revenue—or can’t stomach cannabis—there is an alternative vice: gambling. Roughly 20 years ago, only six states permitted commercial casinos, according to USA Today. Now, 20 states and two U.S. territories permit commercial casinos, and 30 states allow tribal casinos.
Instead of introducing more casinos, many states will pick an easier target: “daily” fantasy websites like FanDuel and DraftKings. Although these companies claim to provide “games of skill,” Pennsylvania, California, Illinois and other states are already drafting legislation to regulate and tax them. With Americans projected to spend $3 billion on daily fantasy entry fees in 2015 alone, these sites are simply too good not to tax.
Opacity When It’s Convenient
As state tax systems have evolved, many had no choice but to let taxpayers take advantage of opaque laws. Consider the exemptions listed on a state tax return. Some filers used to check “Other,” in part because the state didn’t have the resources to flag those returns and follow up. Now that states have sophisticated software, that game is over. Revenue departments will request an explanation shortly after you submit a return with “Other” checked.
At the same time, states will implement their own tax laws more opaquely when it can help them increase revenue. For instance, many states with “occasional filing” statutes have effectively stopped using them. Normally, occasional filing statutes exempt business from regular filing requirements. For instance, in Oklahoma, if you sell in the state once or twice per year, you need only file for those sales. You’re not expected to submit a monthly return.
However, taking advantage of the muddiness around occasional filing, some states and local governments now either refuse occasional filings or auto-register business that identify as occasional filers. In some states, this is a way to charge more merchants a registration fee. In all states, this strategy will prevent sales from slipping through the cracks and increase the likelihood that sellers make mistakes on their monthly returns, file late or take other actions that incur a penalty fee. It’s a way to bring in extra revenue without imposing on local, voting residents.
Sufficient Presence 2.0
States only used to tax businesses if they had “nexus,” a sufficient physical presence within state boundaries. Now that a hefty chunk of commerce occurs online, states want to tax merchants if they have a sufficient “connection” to their jurisdiction. The so-called “Amazon Tax,” passed by 26 states, illustrates this point. These laws argue that a virtual presence is sufficient for online retailers to establish nexus. Colorado’s rendition of the Amazon Tax shows just how far states may go to reinvent nexus in 2016.
In 2010, Colorado passed an Amazon Tax requiring that all ecommerce businesses either a) collect tax on any sales made in state, or b) provide the Colorado Department of Revenue with a master report detailing every “purchaser’s purchases.” If that sounds like a requirement from Nineteen Eighty-Four, well, that might be the idea.
By making the reporting requirement odious enough, Colorado may have hoped that retailers would collect taxes without a fuss. Unfortunately for Colorado, Amazon canceled its relationship with in-state 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 purpose of Colorado’s Amazon Tax is obvious. According to The Denver Post, Colorado lost an estimated $172.7 million in 2012 because residents didn’t pay tax on goods shipped from out of state. Sufficient presence 2.0 is about liberalizing definitions of nexus to make up for tax revenue lost to ecommerce.
Crushed between unsustainable debt and dread of angering voters, state politicians will try to find alternatives to raising taxes and slashing budgets. By legalizing pot, manipulating opaque laws and changing the rules of nexus, elected official may be able to stay in office without making their states insolvent. More likely though, our political system will postpone tough fiscal decisions until we reach crisis levels. Procrastination is always a safe political move.
Jonathan Barsade is CEO of the sales tax software company Exactor.