The state of sales tax in 2023

Most states entered the year with full pockets and expect continued revenue growth for fiscal year 2023. Feeling flush, many governors are proposing income tax or property tax cuts, or new tax credits. So, what’s the state of sales tax in 2023?

Sales tax wasn’t mentioned in most of the State of the State addresses that filled the January calendar, but it rarely is. For the most part, sales tax is discussed only when a governor has a proposal to cut it. 

Governor Jim Justice of West Virginia is a notable exception: In his 2017 State of the State address, he told West Virginians that though he didn’t want to, he intended to raise the state’s sales tax. He proposed an even greater sales tax rate increase in his 2021 address. Despite those pronouncements, the West Virginia sales tax rate has yet to be increased, and Justice didn’t mention sales tax in his 2023 address. Instead, he put a 50% reduction in personal income tax on the table.

But back to sales tax.

The governors of seven states proposed one or more sales tax changes in their 2023 State of the State addresses. 

Arizona Governor Katie Hobbs wants to exempt diapers and feminine hygiene products from state sales tax (aka, transaction privilege tax).

Kansas Governor Laura Kelly wants to exempt diapers and feminine hygiene products, and to create a four-day summer sales tax holiday for school supplies. She’d also like to immediately eliminate the sales tax on food, which is currently being phased out and set to hit 0% in 2025.

Nevada Governor Joe Lombardo would like to suspend the state motor vehicle fuel tax for the next 12 months.

New Mexico Governor Michelle Lujan Grisham would like to cut the gross receipts tax rate — again — to help consumers save money. The first gross receipts tax cut in 40 years took effect July 1, 2022, when the rate dropped from 5.125% to 5%.

Rhode Island Governor Daniel McKee introduced a proposal to reduce the state sales tax from 7% (one of the highest state rates in the nation) to 6.85%. He also wants to stop a scheduled gas tax rate increase, eliminate the litter tax, and create a gross receipts tax rebate for energy bills.  

South Dakota Governor Kristi Noem would like to exempt groceries, which would take a $102.4 million bite out of the state’s sales tax revenue. But the state has a healthy surplus, and Noem believes eliminating the tax on food would benefit every person in the state. 

Wisconsin Governor Tony Evers wants local communities to get a bigger cut (up to 20%) of the state’s sales tax revenue. He said this would give local governments more than half a billion dollars to “invest in key priorities like EMS, fire, and law enforcement services, transportation, local health and human services,” and more.

These are the headline-grabbing sales tax proposals, but they aren’t the only sales tax changes that will be considered by state legislatures this year. 

If South Dakota doesn’t exempt food, it may lower the rate on food and drink; and if the legislature doesn’t exempt or cut the tax on food, the voters might. The South Dakota Secretary of State has received two proposed ballot measures seeking to prohibit the taxation of  “anything sold for eating or drinking by humans, except alcoholic beverages, tobacco, or prepared food.”

Then again, South Dakota may simply cut the state sales and use tax rate from 4.5% to 4%. 

South Dakota is also looking to eliminate its economic nexus transaction threshold, which would mean remote businesses that make more than 200 transactions in a year but less than $100,000 in sales in a year in the state would not need to register for sales tax. This is something a number of states have already done. Update: The 200-transaction threshold is eliminated effective July 1, 2023.

And South Dakota isn’t the only flush state looking to cut sales tax in one way or another. Other proposals include: 

• Arkansas and Missouri may increase the sales and use tax exemption for used motor vehicles

• California and Pennsylvania may exempt gun safety devices or systems

• Florida may exempt diapers as well as private investigative services

• Mississippi may exempt computer software or software services used as a business input

• New York may create a one-week sales tax holiday for food and drink at restaurants and a monthlong sales tax holiday for certain products purchased for less than $500 between the fourth Friday in November and December 26

• New York is also looking to exempt from use tax “purchases made outside the state and brought into the state” — provided their value doesn’t exceed $2,500

• Oklahoma may exempt diapers and baby formula, groceries, and occasional sales (i.e., one or two retail sales of taxable items by a person who doesn’t habitually engage in the business of selling taxable items at retail) 

• Rhode Island may exempt reusable bags and also beer and malt beverages

• Utah may remove the state sales and use tax on certain food

• Virginia may exempt food and essential personal hygiene products from local sales and use tax (these transactions are already exempt from state sales and use tax)

• Washington may exempt reusable packing materials

Of course, states could also adopt new sales taxes or implement rate hikes. For example:

• Georgia may allow local governments to adopt special purpose local sales and use taxes

• Nebraska may authorize county sales and use taxes

• Texas may tax ammunition, firearms, assault weapons, and vaping products

• Vermont may tax vendor-hosted prewritten computer software

• Virginia may authorize all counties and cities to impose an additional local sales and use tax

• Wyoming may repeal the exemption for food (a proposal to tax services has already failed)

Quite a few other bills proposing sales and use tax changes have been introduced in state legislatures, and while not all will become law, some likely will. 

States may push to tax digital advertising and data

Connecticut, Indiana, Massachusetts, and New York are among the states looking to tax digital advertising and/or data, even as Maryland continues to fight for the right to enforce a controversial digital advertising tax introduced back in 2020. Yet states seem unsure how to best go about taxing these services. Massachusetts has introduced at least eight different digital tax bills.

States may legislate on cryptocurrency and NFTs

In 2023, more states could legislate on cryptocurrency and clarify whether and how non-fungible tokens (NFTs) are taxed. For example, Connecticut may allow cryptocurrency to be purchased with a credit or debit card; Maryland may prohibit the use of cryptocurrency in campaign finance situations; New York would allow establish cryptocurrencies as a form of tax payment; and the District of Columbia may regulate cryptocurrency and NFTs.

States may use tax credits to encourage automation

North Dakota has come up with an interesting plan to counter the ongoing workforce shortage: Governor Doug Burgum plans to expand the state’s automation tax credit, which expired in 2022, to incentivize industries to adopt automation and invest “in a workforce transition training program to retrain and upskill citizens pursuing new opportunities through automation.” 

If the automation tax credit is continued, manufacturers would have to prove the equipment they buy either improves job quality or increases productivity. House Bill 1168 offers more details.

States may use certain sales tax collections for specific purposes

South Carolina lawmakers are considering a proposal that would put sales tax revenue derived from sporting goods stores toward capital improvements on public lands. It’s an interesting idea, earmarking collections from specific products (rather than locations) for specific purposes.

It remains to be seen whether any of the above proposals, or others, will become law. Much will depend on the state of the economy and the political climate. We’ll let you know what does transpire here at the Tax Desk.