As I recently discussed in an article published in the September issue of CCH Executive’s Tax & Management Report, state and local governments are facing some of the worst budget challenges ever.  In many states, the debate is how much to cut services versus increasing revenue.  Individuals and businesses are very vocal that increasing taxes at this time will just make it harder for them and result in further reductions in state revenue as the increased taxes will put them out of business.  Therefore, the states are facing real challenges – how can they increase revenues at times when businesses and individuals are least able to pay?

A report prepared by the National Conference of State Legislators discusses how states’ budget crises are getting worse.  Most states overestimated the expected revenue from all tax sources, including sales and use taxes.  Now that the numbers are in, it is worse than they thought.  Half of the states overestimated all three major tax sources – sales tax, personal income tax and corporate income tax.  As a result, what are we seeing from the states as they deal with the reduced revenue?  Since sales and use taxes are collected on a regular basis throughout the year, I will predominately focus on the states’ different approaches on these issues.

• During the legislative session, we saw eliminations of exemptions (sometimes called “loop-holes”), broadening of the tax base to include new areas such as services, changes in interpretations of what constitutes “doing business” in the state and some significant state rate increases.  Massachusetts increased their state sales tax from 5% to 6.25% effective August 1.  The District of Columbia increased from 5.75% to 6% on October 1 and North Carolina increased twice from 4.5% to 5.5% on September 1 and again to 5.75% on October 1.

• We’ve seen a number of states proposing and passing amnesty programs as a way to get some quick cash in the door as well as new taxpayers.  These have proved to be very lucrative for the states in the past and they are all hoping for this trend to continue.  Twelve states and two cities have or will offer amnesty during 2009. 

One of the most visible and controversial changes has been what has been termed the “Amazon” laws which classify affiliates who direct on-line customers to an out-of-state merchant’s web page to be deemed “agents” of the remote merchant.  This law was passed in New York in 2008 and in Rhode Island and North Carolina in 2009.  However, a number of other states proposed legislation only to have it either vetoed by the governor or tabled after Amazon threatened to sever affiliate programs in the state.  This has raised the question of whether the states’ actions to add taxpayers to its roles would increase revenues or actually decrease them since it could put the in-state affiliates out of business.  This will be something to watch in next year’s legislative process.

More information on state solutions will be given next week in Part 2 of this blog, including tips on what businesses can do to get ready for sales tax audits.

Diane L. Yetter
President, Yetter Consulting Services, Inc.
dyetter@ycstax.com

About the author: Diane L. Yetter is the founder and president of Yetter Consulting Services, Inc. and the Sales Tax Institute, its training division.