Tax Trends at the Dawn of 2020

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Tax Trends at the Dawn of 2020

Key Findings

• State tax changes are not made in a vacuum. States often adopt policies after

watching peers address similar issues. Several notable trends in tax policy

have emerged across states in recent years, and policymakers can benefit

from taking note of these developments.

• The enactment of the federal Tax Cuts and Jobs Act (TCJA) in late 2017

expanded many states’ tax bases and drove deliberations on tax conformity.

By the end of 2019, all but four states with individual or corporate income

taxes (or, in the case of Texas, a gross receipts tax that relies on federal

definitions) updated their conformity date to reflect a post-TCJA version of

the Internal Revenue Code.

• Many states incorporate the new federal tax on Global Intangible Low-Taxed

Income (GILTI) by default, which often positions them to meaningfully tax

international income for the first time and, in many cases, raises serious

constitutional questions. In 2018, few states had issued guidance on their

approach to GILTI, but by the end of 2019, 17 states taxed GILTI and had

issued guidance to that effect, and another seven states and the District of

Columbia may tax GILTI but have yet to offer guidance to taxpayers.

• Five states cut corporate income taxes in 2019, and another two have

reductions effective on, or which will be backdated to, January 1, 2020.

• Six states cut individual income tax rates in 2019, three of them retroactive

to 2018 and designed as a response to the base-broadening provisions of the

TCJA.

• The U.S. Supreme Court’s Wayfair v. South Dakota decision ushered in a new

era of sales taxes on e-commerce and other remote sales, with 43 of the 45

states with state sales taxes implementing a remote seller regime by the end

of 2019, though state legislation on marketplace facilitators remains a work in

progress, with amendments likely in many states.

FISCAL

FACT

No. 684

Jan. 2020

Jared Walczak

Director of State Tax Policy

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• Illinois was the only state to adopt legislation legalizing and taxing marijuana in 2019, but

despite a slowdown, 2020 is shaping up to be a significant year, with some states exploring

coordinated legalization efforts.

• A 2018 court ruling has states scrambling to legalize and tax sports betting, and eight states

did so in 2019, joining 12 other states and the District of Columbia which already have active

sports betting markets. The new rates range from 6.75 percent of gross revenues in Iowa to 51

percent in a monopolistic franchise system in New Hampshire.

• Another 11 states implemented excise taxes on vaping in 2019, as states continue to split on

their approach to vapor taxation—specific excise or ad valorem taxes.

• After decades of ignoring a gradual erosion of gas taxes, states are now taking adjustments

seriously, with four states adopting new rates in 2019 and a growing number of states using

inflation indexing.

• States continue to raise the exemption thresholds for their estate taxes following the repeal

of two estate taxes in 2018, continuing a decade-long trend away from taxes on estates and

inheritances.

• Declining revenues from oil, gas, and other natural resources are forcing energy-rich states to

scrutinize their tax codes and, in some cases, contemplate new taxes.

• Policymakers would do well to pay attention to the experiences of their peers—to learn from

their mistakes as well as their successes.

Introduction

The dawning of a decade instills a sense of newness and possibility, and perhaps anxiety, but

whatever else may be in doubt, things as certain as death and taxes can be more firmly believed.

The new decade will have its share of new ideas and challenges—the state taxation of international

income, for instance, or of remote sales or even of sports betting—but also more than its fill of old

ones. And even the “new” draw from the old, for what’s past is prologue, now as always.

State tax policy decisions are not made in isolation. Changes in federal law, global markets, and other

exogenous factors create a similar set of opportunities and challenges across states. The challenges

faced by one state often bedevil others as well, and the proposals percolating in one state capitol

often show up elsewhere. Ideas spread and policies can build their own momentum. Sometimes a

trend emerges because one state consciously follows another, and in other cases, similar conditions

result in multiple states trying to solve the same problem independently.

1 Daniel Defoe, The Political History of the Devil (London: T. Warner, 1726), 269.

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Identifying state tax trends serves a dual purpose: first, as a leading indicator providing a sense of

what we can expect in the coming months and years, and second, as a set of case studies, placing

ideas into greater circulation and allowing empirical consideration of what has and has not worked.

Policymakers across the country can benefit from a greater awareness of these trends.

Four key developments underlie many tax trends from 2019, some of them continuing from

prior years. First, the adoption of the federal Tax Cuts and Jobs Act of 2017 (TCJA) continues to

reverberate through state tax codes, particularly in the realm of international taxation. Second, the

U.S. Supreme Court’s 2018 decision in Wayfair v. South Dakota is still playing out in state capitols as

lawmakers tinker with their newly empowered remote seller and marketplace facilitator sales and

use tax regimes. Third, expanding legal markets in gaming, marijuana, and vapor products provide

new avenues for excise taxation. And fourth, changes roiling the energy sector are showing up in

the budgets of states heavily reliant on extractive industries, with potential consequences for state

taxation.

Income Taxes

Across the country, income tax policies—both individual and corporate—were heavily influenced by

the enactment of federal tax reform. States grappled with how to conform to the provisions of the

new tax law, and in some cases sought to help their taxpayers circumvent its effects. The past year

saw reductions in individual and corporate income tax rates and the adoption of further reforms

intended to enhance the neutrality of individual income tax codes.

IRC Conformity Updates

Most states begin their own income tax calculations with federal definitions of adjusted gross income

(AGI) or taxable income, and they frequently incorporate many federal tax provisions into their own

codes. The degree to which state tax provisions conform to the federal Internal Revenue Code (IRC)

varies, as does the version of that code to which they conform. Some states have “rolling conformity,”

meaning that they couple to the current version of the IRC, while others have “static conformity,”

utilizing the IRC as it existed at some fixed date. Although exceptions exist, most states with static

conformity update their conformity date every year as a matter of course.

The adoption of the Tax Cuts and Jobs Act turned what had been routine into a serious policy

deliberation. Most states stand to see increased revenue due to federal tax reform, with expansions

of the tax base reflected in state tax systems while corresponding rate reductions fail to flow down.

The increase in the standard deduction, the repeal of the personal exemption, the creation of a

deduction for qualified pass-through business income, the narrowing of the interest deduction, the

cap on the state and local tax deduction (which affects state deductions for local property taxes),

adjustments to the treatment of net operating losses, and enhanced cost recovery for machinery and

equipment purchases, and even some of the provisions on the taxation of international income, flow

through to the tax codes of some states—in different combinations, depending on the federal code

sections to which they are coupled.

2 Jared Walczak and Erica York, “GILTI and Other Conformity Issues Still Loom for States in 2020,” Tax Foundation, Dec. 19, 2019, https://taxfoundation.

org/gilti-state-conformity-issues-loom-in-2020/; Jared Walczak, “Tax Reform Moves to the States: State Revenue Implications and Reform Opportunities

Following Federal Tax Reform,” Tax Foundation, Jan. 31, 2018, https://taxfoundation.org/state-conformity-federal-tax-reform/.

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States, therefore, were faced with choices. They could continue to conform to an older version of

the IRC to avoid these revenue implications.

Alternatively, if conforming to the IRC post-TCJA, they

could decouple from revenue-raising provisions, cut tax rates or implement other tax reforms to

offset revenue increases, or do nothing, keeping the additional revenue.

At the conclusion of 2018, 32 states and the District of Columbia conformed to a version of the IRC

which includes the reforms adopted under the Tax Cuts and Jobs Act. By the end of 2019, all but

four states with individual or corporate income taxes (or, in one case, a gross receipts tax that uses

IRC definitions) conformed to a post-TCJA version of the IRC. The remaining outliers are California,

Massachusetts (for individual income taxes only), New Hampshire, and Texas (for its gross receipts

tax).

Entering 2020, 21 states and the District of Columbia use rolling conformity for both their individual

and corporate income taxes, while two states—Massachusetts and Pennsylvania—employ rolling

conformity exclusively for their corporate income taxes. Another 15 states use static conformity for

both taxes, while the remaining states with income taxes use selective conformity, defining most

major tax provisions independently of the federal tax code.

Addressing the Taxation of International Income

Historically, federal taxes extended to international income, with credits for taxes paid to other

countries. If the U.S. rate was higher than the rate in the country where income was earned,

taxpayers remitted the difference to the Internal Revenue Service. State tax codes, by contrast,

generally did not reach beyond the “water’s edge”—or at least, only did so on a very limited basis. One

of the great ironies of the Tax Cuts and Jobs Act is that a law intended to pull the federal government

back from the taxation of international income has become a vehicle for states to expand significantly

into that realm for the first time.

With the U.S. now operating on a quasi-territorial tax code, guardrails were established to curtail

profit shifting by placing intangibles like patents or trademarks in low-tax countries. One of these,

the tax on Global Intangible Low-Taxed Income (GILTI), automatically flows through to the tax code

of many states unless they intentionally decouple or make an administrative determination that

GILTI qualifies for existing deductions for foreign dividend income. Consequently, while the federal

government is trying to get out of the business of taxing international income (more or less), some

states are moving in the opposite direction.

State tax codes, however, were not designed with international income in mind, nor is there a

compelling reason why the income of foreign subsidiaries (controlled foreign corporations) should

be taxable in a U.S. state. Bringing all this international income into a state’s tax base, moreover,

can drastically expand corporate income tax liability for firms headquartered in a given state,

undercutting a state’s business competitiveness. Finally, depending on how states tax GILTI, they

3 In some cases, the implications cannot be wholly avoided by failing to conform to the IRC post-TCJA. For instance, Virginia expressly decouples from the

provisions of the new federal law, but it requires filers’ choice to take the federal standard deduction to be replicated on their state tax forms. Because

many more filers will benefit from taking the federal standard deduction, Virginia can expect additional revenue as these filers must now take Virginia’s

standard deduction even though, all else being equal, they would benefit from being able to itemize at the state level.

4 Jared Walczak and Erica York, “GILTI and Other Conformity Issues Still Loom for States in 2020.”

5 Id.

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risk long and costly litigation. In many states, there is no provision for the fair apportionment of

GILTI in the state tax code, leading to its overinclusion, and in states which adopt separate rather

than combined reporting (meaning that they do not normally tax all related companies as a single

entity), a difference in treatment between international and U.S.-based subsidiaries raises additional

constitutional issues.

FIGURE 1.

For these and other reasons, states have been slow to issue guidance on if and how they tax GILTI,

even two years after enactment of the TCJA. In 2019, however, that dam began to break, and

additional activity should be anticipated in 2020. More states will issue guidance on how much, if any,

GILTI is included in the tax base and how it is apportioned. As policymakers become more familiar

with the issue, new legislation either decoupling or limiting GILTI is likely, and it is also plausible that

the first serious round of litigation will commence in states that overreach.

Entering 2019, few states had outlined their approach to GILTI taxation. By year’s end, 17 states

taxed GILTI and had guidance to that effect, leaving seven remaining states and the District of

Columbia that might hypothetically tax GILTI based on their tax definitions, but where guidance is

not yet forthcoming. Every state taxing GILTI incorporates some sort of deduction, most commonly

following the federal government in providing a 50 percent deduction under IRC § 250, often

in tandem with a dividends received deduction (DRD) worth 80 to 100 percent of the inclusion.

Consequently, nine states include 50 percent of GILTI (the § 250 deduction only) and eight include

amounts ranging from 5 to 30 percent, though proper factor representation is still largely lacking.

Source: State statutes and guidance; Tax Foundaon research.

Potenally Taxes GILTI (No Guidance)

Currently Taxes GILTI

No Corporate Income Tax

AK*

Does Not Tax GILTI

Note: (*) Alaska taxes GILTI but has not released oﬃcial guidance.

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State Taxaon of GILTI

20%

30%

50%

20%

50%

100%

As of January 1, 2020

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TABLE 2 .

State Taxation of GILTI

State Inclusion In Starting Point § 250 DRD Guidance

Alabama (a) 50% Yes Yes 0%

✓

Alaska 20% Yes No 0%

✗ (b)

Arizona 0% No No 100%

Arkansas 0% No No 100%

California 0% No (c) No 0%

Colorado 50% Yes Yes 0%

✗

Connecticut 5% Yes No 95%

✓

Delaware (a) 50% Yes Yes 0%

✗

Florida 0% No No 100%

Georgia 0% No Yes 100%

Hawaii 0% No No 100%

Idaho (d) 15% Yes Yes 85%

✓

Illinois 0% No No 100%

Indiana 0% No No 100%

Iowa (a) 50% Yes Yes 0%

✓

Kansas 50% Yes Yes 0%

✗

Kentucky 0% No No 100%

Louisiana 0% Yes Yes 100%

✓

Maine 50% Yes No 0%

✓

Maryland (a) 50% Yes Yes 0%

✓

Massachusetts 5% Yes No 95%

✓

Michigan 0% No Yes 100%

Minnesota 0% No No 100%

Mississippi 0% No No 100%

Missouri 0% No Yes 100%

Montana 20% Yes No 80%

✗

Nebraska 50% Yes Yes 0%

✓

Nevada n.a. n.a. n.a. n.a.

New Hampshire 50% Yes Yes 0%

✓

New Jersey 50% Yes Yes 0%

✓

New Mexico 0% No Yes 100%

New York 5% Yes No 0%

✓

North Carolina 0% No No 100%

North Dakota (e) 30% Yes No 70%

✓

Ohio n.a. n.a. n.a. n.a.

Oklahoma 0% Yes No 100%

Oregon 20% Yes No 80%

✓

Pennsylvania 0% No No 100%

Rhode Island 50% Yes No 0%

✓

South Carolina 0% No No 100%

South Dakota n.a. n.a. n.a. n.a.

Tennessee 5% Yes Yes 95%

✓

Texas 0% No (c) No 0%

Utah 100% Yes No 0%

✗

Vermont 50% Yes Yes 0%

✓

Virginia 0% No Yes 100%

Washington n.a. n.a. n.a. n.a.

West Virginia 50% Yes Yes 0%

✗

Wisconsin 0% No No 100%

Wyoming n.a. n.a. n.a. n.a.

District of Columbia 50% Yes Yes 0%

✗

(a) Separate reporting state, raising constitutional issues under Kraft.

(b) Alaska currently taxes GILTI, but has not issued guidance to this effect.

(d) The deduction is reduced to 80 percent if the taxpayer elects not to submit domestic disclosure spreadsheets.

(e) A 70 percent deduction for foreign dividends is available for companies filing returns using the water’s edge method,

while GILTI is eliminated (100 percent deduction) as duplicative for companies using a worldwide combined reporting

method.

Sources: State statutes and guidance; Tax Foundation research.

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Corporate Income Tax Rate Reductions

Corporate income taxes represent a small and shrinking share of state revenue, the product of a

long-term trend away from C corporations as a business entity and ever-narrowing bases due to

the accumulation of tax preferences. (The pass-through sector has grown dramatically, both in raw

numbers and share of business income, over the past few decades, due in no small part to the Tax

Reform Act of 1986, which lowered the top individual income tax rate from 50 to 28 percent.

)

Fifteen states and the District of Columbia have cut corporate taxes since 2012, including five in

2019 and two others effective on or retroactive to January 1, 2020.

In 2019, Georgia cut its corporate rate from 6.0 to 5.75 percent, the first of two planned reductions

in response to the base-broadening provisions of the TCJA.

With little fanfare, Florida met a

previously-established tax trigger in September and reduced its corporate income and franchise tax

rate from 5.5 to 4.458 percent, retroactive to January 1, 2019.

Indiana continued a series of rate reductions that began in 2011, reducing its rate from 5.75 to 5.5

percent; based on 2014 legislation, it is currently slated to continue a phasedown to 4.9 percent. New

Hampshire, which has two statewide business taxes (the business profits tax, the state’s corporate

income tax, and the business enterprise tax, a kind of value-added tax), reduced both rates in 2019,

from 7.9 to 7.7 and 0.675 to 0.6 percent respectively. North Carolina trimmed its corporate income

tax yet again, from 3.0 to 2.5 percent, the nation’s lowest corporate income tax rate, as revenues

continue to meet or exceed projections.

Several states, moreover, have already implemented rate cuts in 2020. In Missouri, the corporate

income tax rate declined from 6.25 to 4.0 percent as of January 1 as the state switched to single

sales factor apportionment for most corporations, eliminating the choice of apportionment factor

that existed previously.

A tax reform package adopted in December 2019 will see Utah’s corporate

income tax rate reduced from 4.95 to 4.66 percent, a rate which will go into effect in February 2020

retroactive to the start of the year.

In July, Indiana’s corporate income tax rate will be cut again, to

5.25 percent.

Although few states have repealed their corporate income taxes, their volatility, narrowing bases,

economic impacts, and modest contribution to state revenues have all contributed to states’ decisions

to reduce reliance on the tax.

6 Scott Greenberg, “Pass-Through Businesses: Data and Policy,” Tax Foundation, Jan. 17, 2017, 7, https://taxfoundation.org/

pass-through-businesses-data-and-policy/.

7 Jared Walczak, “Tax Changes Taking Effect January 1, 2019,” Tax Foundation, Dec. 27, 2018, https://taxfoundation.org/state-tax-changes-january-2019/.

8 Katherine Loughead, “State Tax Changes as of January 1, 2020,” Tax Foundation, Dec. 20, 2019, https://taxfoundation.

org/2020-state-tax-changes-january-1/.

9 Jared Walczak, “Tax Changes Taking Effect January 1, 2019.”

10 Jared Walczak, “Missouri Governor Set to Sign Income Tax Cuts,” Tax Foundation, July 11, 2018, https://taxfoundation.org/

missouri-governor-set-sign-income-tax-cuts/.

11 Jared Walczak, “Utah Passes Tax Reform Bill in Special Session,” Tax Foundation, Dec. 12, 2019, https://taxfoundation.org/utah-sales-tax-reform/.

12 Katherine Loughead, “State Tax Changes as of January 1, 2020.”

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FIGURE 2.

TABLE 2 .

State Corporate Income Tax Rate Cuts Since 2012

State 2012 2020 Scheduled

Arizona 6.968% 4.9% —

Florida 5.5% 4.458%

Georgia 6.0% 5.75% 5.5%

Idaho 7.6% 7.4% —

Illinois 9.5% 7.75% —

Indiana 8.5% 5.5% 4.9%

Missouri 6.25% 4.0% --

New Hampshire 8.5% 7.7% --

New Mexico 7.6% 5.9% —

New York 7.1% 6.5% —

North Carolina 6.9% 2.5% --

North Dakota 5.2% 4.31% —

Rhode Island 9.0% 7.0% —

Utah 5.0% 4.95% 4.66%

West Virginia 7.75% 6.5% —

District of Columbia 9.975% 8.25% —

Source: Tax Foundation research

Source: Tax Foundaon research.

No Corporate Income Tax

OH*

TX*

NV*

WA*

VT NH

Cut Corporate Rate Since 2012

Note: (*) Imposes a gross receipts tax in lieu of a corporate incomte tax.

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States with Corporate Income Tax Rate Cuts Since 2012

As of January 1, 2020

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Individual Income Tax Rate Cuts

Continued state responses to the TCJA have increased the pace at which states have cut individual

income taxes, with six states cutting rates in 2019 (three retroactive to 2018) and another two doing

so effective January 1, 2020. (Two states, Arkansas and Massachusetts, saw rate cuts both years.)

Arkansas is the only state with multiple independent rate schedules depending on the filer’s taxable

income, with filers shifting schedules—and not just facing higher marginal rates—as their income rises.

As part of a broader tax reform package, the top rate for the lowest schedule (for incomes under

$21,000) declined from 4.4 to 3.4 percent, with lower brackets seeing rate reductions as well.

January 1, 2020, further rate cuts took effect, with the top marginal rate declining from 6.9 to 6.6

percent.

Georgia cut its individual income tax from 6.0 to 5.75 percent in tandem with its corporate

income tax rate reduction, and three states—Idaho, Utah, and Vermont—cut individual income tax

rates in 2019 but retroactive to 2018 in response to base broadening under federal tax reform.

Massachusetts continues to phase in rate reductions subject to revenue availability, trimming the rate

from 5.15 to 5.1 in 2019 and cutting it further to 5.05 percent in 2020.

Many other states have also seen additional revenue from the TCJA that could facilitate rate

cuts, though the further removed from federal tax reform, the less likely that states will predicate

additional income tax rate reductions on revenue they have already added to their baselines.

13 Jared Walczak, “Tax Changes Taking Effect January 1, 2019.”

14 Katherine Loughead, “State Tax Changes as of January 1, 2020.”

15 Id.

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Sales and Excise Taxes

After the Wayfair decision, states moved quickly to impose collection and remittance obligations on

remote sellers previously out of reach, and to create marketplace facilitator regimes requiring certain

platforms to collect on behalf of their sellers. Meanwhile, shifting public attitudes, a changing legal

environment, and product innovations are responsible for a spate of new or revised “sin” taxes on

marijuana, sports betting, and vapor products, a trend likely to continue in coming years. Many states

also adopted gas tax increases in 2019.

Revising Remote Sales Tax Standards

E-commerce represented 11.2 percent of all retail sales in the third quarter of 2019,

a slice of the

retail pie that states are increasingly able to capture in the aftermath of the U.S. Supreme Court’s

decision in Wayfair v. South Dakota, which struck down the physical presence requirement for

substantial nexus.

For the most part, states spent 2018 adopting new post-Wayfair remote seller

laws, with companion laws imposing similar obligations on marketplace facilitators—platforms like

Amazon Marketplace, eBay, or even UberEats—coming into their own in 2019. The year closed

out with 43 of the 45 states with statewide sales taxes implementing collection and remittance

obligations for remote sellers, and 38 states having provisions targeted at marketplace facilitator

regimes.

This is, however, only the beginning of states’ responses to Wayfair, not the end. Policy and legal

uncertainties continue to plague marketplace facilitator regimes, which vary substantially across

states, and a few states are still grappling with policy solutions to make their sales tax regimes

Wayfair-compliant.

At year’s end, both the Multistate Tax Commission (MTC) and the National Conference of State

Legislatures (NCSL) were heavily engaged on the policy development front, with the MTC issuing

a new white paper on the design and implementation of marketplace facilitator laws and related

regulations, and NCSL still working on model legislation. Most states have a law in place, but the

administration of those facilitator regimes, and possibly the text of the laws themselves, remain very

much in flux. This is especially important because, early on, some states adopted extremely broad,

vague definitions of what constitutes a marketplace facilitator—definitions that generate uncertainty

and, if applied expansively, could lead to double taxation and other undesirable consequences.

16 U.S. Census Bureau, “Quarterly Retail E-Commerce Sales, 3rd Quarter 2019,” CB19-170, Nov. 19, 2019, https://www.census.gov/retail/mrts/www/data/

pdf/ec_current.pdf.

17 South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018).

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TABLE 3.

Remote Seller and Marketplace Facilitator Requirement Effective Dates

State Remote Seller Marketplace Facilitator

Alabama 10/1/2018 1/1/2019

Alaska No state sales tax

Arizona 9/30/2019 10/1/2019

Arkansas 7/1/2019 7/1/2019

California 4/1/2019 10/1/2019

Colorado 6/1/2019 10/1/2019

Connecticut 7/1/2019 12/1/2018

Delaware No sales tax

Florida n.a. n.a.

Georgia 1/1/2019 n.a.

Hawaii 7/1/2018 1/1/2020

Idaho 6/1/2019 6/1/2019

Illinois 10/1/2018 1/1/2020

Indiana 10/1/2018 7/1/2019

Iowa 7/1/2019 7/1/2019

Kansas 10/1/2019 10/1/2019

Kentucky 10/1/2018 7/1/2019

Louisiana 7/1/2020 n.a.

Maine 7/1/2018 10/1/2019

Maryland 10/1/2018 10/1/2019

Massachusetts 10/1/2019 10/1/2019

Michigan 10/1/2018 n.a.

Minnesota 10/1/2019 10/1/2019

Mississippi 9/1/2018 n.a.

Missouri n.a. n.a.

Montana No sales tax

Nebraska 1/1/2019 4/1/2019

Nevada 10/1/2018 10/1/2019

New Hampshire No sales tax

New Jersey 11/1/2018 11/1/2018

New Mexico 7/1/2019 7/1/2019

New York 6/21/2018 6/1/2019

North Carolina 11/1/2018

North Dakota 10/1/2018 7/1/2019

Ohio 8/1/2019 8/1/2019

Oklahoma 11/1/2019 11/1/2019

Oregon No sales tax

Pennsylvania 7/1/2019 7/1/2019

Rhode Island 8/17/2017 7/1/2019

South Carolina 11/1/2018 4/26/2019

South Dakota 11/1/2018 3/1/2019

Tennessee 7/1/2019 n.a.

Texas 10/1/2019 10/1/2019

Utah 1/1/2019 10/1/2019

Vermont 7/1/2018 6/1/2019

Virginia 7/1/2019 7/1/2019

Washington 10/1/2018 10/1/2018

West Virginia 1/1/2019 7/1/2019

Wisconsin 10/1/2018 1/1/2020

Wyoming 2/1/2019 7/1/2019

District of Columbia 1/1/2019 1/1/2019

Sources: State statutes; regulations and guidance; Tax Foundation research.

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Although the Wayfair decision eliminated the physical presence requirement, it did not bless

all possible alternatives. States must still abide by existing Due Process and Commerce Clause

constraints in designing their remote sales tax regimes, and most have elected to be guided in this

process by the tax simplification provisions commended in the Wayfair decision—what we and others

have termed the “Wayfair Checklist.”

The factors present in the challenged South Dakota law, which

the Supreme Court strongly suggested would protect it against any further legal challenges, include:

1. A safe harbor for those only transacting limited business in the state;

2. An absence of retroactive collection;

3. Single state-level administration of all sales taxes in the state;

4. Uniform definitions of goods and services;

5. A simplified tax rate structure;

6. The availability of sales tax administration software; and

7. Immunity from errors derived from relying on such software.

Most states comply with the majority of these factors, with participants in the Streamlined Sales

and Use Tax Agreement (SSUTA) faring best, because they all use common definitions, share sales

tax administration software with immunity for any errors it might contain, and, as a condition

of membership, have centralized state administration of all state and local sales taxes and use a

unitary base across all jurisdictions. Regardless of SSUTA status, however, all states except Kansas

have adopted a safe harbor for small sellers, though parameters vary. The absence of a de minimis

exemption for smaller remote sellers can create constitutionally undue burdens.

A few states, most notably Alabama, Colorado, and Louisiana, face serious impediments to legal

collection of remote sales tax—at least the local share—due to the breadth of local tax authority

and the consequent lack of uniformity (with attendant high compliance costs for remote sellers).

Simplification regimes adopted in Alabama and Louisiana face uncertain legal futures. Kansas’ lack of

a safe harbor also raises serious constitutional concerns. These issues deserve to be resolved at the

earliest opportunity. Some states should also view 2020 as an opportunity to clear out the detritus

of the old physical presence regime, eliminating “click-through nexus,” “cookie nexus,” and notice

and reporting requirements—creative, if complex and sometimes legally dubious, ways of expanding

the pool of sales tax collectors in the days before Wayfair permitted the use of economic nexus

standards.

18 Jared Walczak and Janelle Cammenga, “State Sales Taxes in the Post-Wayfair Era,” Tax Foundation, Dec. 12, 2019, https://taxfoundation.org/

state-remote-sales-tax-collection-wayfair/.

19 Id.

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In most states, however, 2020 is likely to be a year of tinkering and building out: adjusting definitions

of marketplace facilitators in both regulation and statute, and enhancing, or providing for the first

time, software solutions for remote sellers. That much of this will take place under the radar does not

lessen its importance. This is a new field of state taxation, and early adopters lacked the benefit of

subsequent deliberation and legal analysis. Policymakers would do well to take advantage of recent

policy developments and legal analysis and to amend their remote seller and marketplace facilitator

laws, where necessary, to ensure that they are consistent with the proper aims of this extension of

state sales taxes: a broader, equitable, more stable, and legally resilient sales tax base that can serve

states and their residents well for decades to come.

TAX FOUNDATION | 14

TABLE 4.

Click-Through, Cookie, and Notice and Reporting Regimes

State Old Nexus Regime(s) Still on the Books Facilitator Law Breadth

Alabama Notice and Reporting Broad

Alaska n.a.

Arizona Narrow

Arkansas Narrow

California Broad

Colorado Narrow

Connecticut Click-Through and Notice and Reporting Narrow

Delaware No Sales Tax

Florida n.a.

Georgia Click-Through n.a.

Hawaii Narrow

Idaho Click-Through Broad

Illinois Narrow

Indiana Broad

Iowa Click-Through and Cookie Broad

Kansas Click-Through and Notice and Reporting Broad

Kentucky Notice and Reporting Broad

Louisiana Click-Through and Notice and Reporting n.a.

Maine Click-Through Narrow

Maryland Narrow

Massachusetts Broad

Michigan Click-Through n.a.

Minnesota Click-Through Narrow

Mississippi n.a.

Missouri Click-Through n.a.

Montana No Sales Tax

Nebraska Narrow

Nevada Click-Through and Notice and Reporting Broad

New Hampshire No Sales Tax

New Jersey Click-Through Broad

New Mexico Narrow

New York Click-Through Narrow

North Carolina Click-Through n.a.

North Dakota Broad

Ohio Broad

Oklahoma Notice and Reporting Narrow

Oregon No Sales Tax

Pennsylvania Click-Through and Notice and Reporting Narrow

Rhode Island Click-Through and Cookie Broad

South Carolina Click-Through and Cookie Narrow

South Dakota Notice and Reporting Narrow

Tennessee Click-Through and Cookie n.a.

Texas Narrow

Utah Broad

Vermont Click-Through and Notice and Reporting Broad

Virginia Broad

Washington Broad

West Virginia Broad

Wisconsin Narrow

Wyoming Narrow

District of Columbia Narrow

Sources: State statutes; guidance; Tax Foundation research.

TAX FOUNDATION | 15

Legalization and Taxation of Marijuana

As public attitudes toward marijuana have changed, states are increasingly revisiting their statutes

on the possession, sale, and taxation of marijuana. Many states now allow medical marijuana,

others have decriminalized possession, and a small but growing number have legalized recreational

marijuana. Thus far, every state which has legalized marijuana has done so in concert with the

implementation of a new excise tax regime.

A marijuana-specific tax regime is not theoretically essential, as it could, post-legalization, simply fall

under the state sales tax like most other consumer goods. The notion that marijuana (like tobacco

products, alcohol, and select other goods) should have its own tax regime has, however, been

largely uncontroversial. These taxes also fund the states’ marijuana regulatory regimes, though in all

cases they raise revenue considerably in excess of these costs and help fund general governmental

expenditures.

Curiously, 2019 itself was a slow year for legalization, with only Illinois adopting such a regime over

the past year, joining 10 other states as of the Illinois statute’s effective date of January 1, 2020.

Michigan chose to implement an already-planned legalization in December 2019 rather than in the

spring of 2020.

Only eight states, however, closed 2019 with active markets.

Illinois’ tax regime is needlessly complex, with a 7 percent excise tax on wholesale value combined

with a 10 percent tax on cannabis flowers or products with less than 35 percent THC, a 20 percent

tax on edibles and other cannabis-infused products, and a 25 percent tax on any product with a THC

concentration of 35 percent or higher. State and local sales taxes also apply. Illinois is, to date, the

only state to tax on the basis of potency.

Despite the slowdown in 2019, however, 2020 is already shaping up to be a significant year on

marijuana policy. The governors of five northeastern states—Connecticut, New Jersey, New York,

Pennsylvania, and Rhode Island—are collaborating in developing a potential common framework

on legalization and taxation of marijuana,

and Arizona, Florida, New Jersey, and Ohio could all see

ballot measures on legalization this year. Other states are sure to consider legalization and taxation as

well. Still, while some legislation can be expected, lawmakers across the country have demonstrated a

marked preference for leaving the decision to voters at the ballot.

Excise taxes tended to be quite high when states first began legalizing marijuana. In 2016, the four

states with recreational marijuana were Washington with a 37 percent excise tax, Colorado at 29

percent, and Alaska and Oregon at 25 percent. These rates may have been too high to drive out gray

and black markets.

Since then, Alaska, Colorado, and Oregon have reduced marijuana tax burdens,

and states which implemented marijuana excise taxes since then have tended to adopt lower rates. As

more states contemplate marijuana legalization, they are likely to consider excise tax rates closer to

those adopted in 2017 through 2019 than those set in 2016.

20 Lauren Gibbons, “Recreational marijuana rollout in Michigan could be national model for how not to do it, industry insider says,” mlive.com, Dec. 13, 2019,

https://www.mlive.com/public-interest/2019/12/recreational-marijuana-rollout-in-michigan-could-be-national-model-for-how-not-to-do-it-industry-

insider-says.html.

21 State of New Jersey news release, “Governor Cuomo, Governor Lamont, Governor Murphy, and Governor Wolf, Co-Host Regional Cannabis Regulation and

Vaping Summit,” Oct. 17, 2019, https://www.nj.gov/governor/news/news/562019/approved/20191017c.shtml.

22 Joseph Bishop-Henchman and Morgan Scarboro, “Marijuana Legalization and Taxes: Lessons for Other States from Colorado and Washington,” Tax

Foundation, May 12, 2016, https://taxfoundation.org/marijuana-taxes-lessons-colorado-washington/.

TAX FOUNDATION | 16

Taxation of Sports Betting

The Supreme Court’s 2018 decision in Murphy v. National Collegiate Athletic Association opened the

way to the legalization and taxation of sports betting, and states are wasting no time joining the

playing field.

Sports betting has changed since the 1992 law was enacted, particularly with the rise of daily fantasy

sports. Not only can bettors lay odds on a team winning straight up or against the spread, but they

can engage in fast-paced in-game betting on discrete events, such as how many three-pointers in

basketball will be made or whether the current drive in football will end with an interception. These

in-game bets enhance the importance of the integrity of in-game data, at least theoretically. That

has been the crux of the argument professional sports leagues—particularly Major League Baseball

(MLB) and the National Basketball Association (NBA)—have advanced for so-called “integrity fees,” in

which as much as 1 percent of the “handle” (the total amount of bets taken) would be remitted to the

league to offset the costs of maintaining the data on which bets are based, and in compensation for

generating the product (the games themselves) which make betting possible.

Many policymakers have questioned the justifications for these integrity fees, and by the end of

2018, some proponents were calling them royalties, which comes closer to explaining the real basis

of the claim. Actual royalties, though, would not require the state to act as collector; unfortunately

for sports leagues, there is little legal precedent to support the notion that statistics and scores

constitute intellectual property. In 2018, many states were contemplating integrity fees, but by the

close of 2019, the leagues appear to be losing that battle.

States which have already legalized casino gambling are particularly likely to permit sports betting,

but they should be conservative in their revenue estimates. Daily fantasy sports and other online

options largely out of reach of state tax regimes will limit taxable betting activity, and collections are

likely to be modest. If states adopt particularly high taxes, they are likely to discourage in-person

betting in competition with online alternatives which are far harder to tax, or even competition across

state lines.

Similar to issues raised by marijuana legalization, brick-and-mortar sports betting facilities will be

competing with black and gray markets, and setting tax rates too high could keep bettors in untaxed

markets. Initially, moreover, a state which legalizes sports betting may attract bettors across state

lines, but this effect should dissipate as more states legalize wagering on sports.

In 2019, eight states approved sports betting and taxation, joining 12 other states and the District

of Columbia which already had active sports betting markets. Colorado voters approved a measure

legalizing sports betting in casinos and online and imposing a tax of 10 percent of adjusted gross

revenues, while in Illinois, the legislature green-lit a 15 percent tax. Indiana set a rate of 9.5 percent,

while Iowa now taxes sports betting at 6.75 percent, which is tied with Nevada—which was

grandfathered in under prior law—for the lowest rate.

TAX FOUNDATION | 17

Michigan began allowing in-person and online sports betting in December, with an excise tax rate

of 8.4 percent. New Hampshire, meanwhile, bucked trends in other states by authorizing a single

company, DraftKings, to run its legalized sports betting system, and requiring them to remit 51

percent of gross revenue for online bets to the New Hampshire lottery fund, with a 50 percent tax on

in-person bets at casinos.

Tennessee, the only state to exclusively authorize online betting, adopted

a tax rate of 20 percent. Finally, two states took different routes, with Montana authorizing sports

betting run exclusively by the state lottery and North Carolina approving sports betting only on tribal

lands.

TABLE 5.

New Excise Tax Rates on Sports Betting, 2019

State Tax Rate

Colorado 10%

Illinois 15%

Indiana 9.5%

Iowa 6.75%

Michigan 8.4%

Montana Lottery-run

New Hampshire 51% online; 50% retail

North Carolina Tribal lands

Tennessee 20%

Source: State statutes; Tax Foundation research.

States increasingly see sports betting as an easy way to obtain a modest revenue infusion, so the

pace of adoption should not be expected to slacken any time soon. Most states seem to have settled

on rates in the high single to low double digits; the major anomaly of 2019, New Hampshire, involves

a monopoly grant to a single company.

Taxation of Vapor Products

The taxation of vapor products is expanding swiftly, with 11 states implementing new excise taxes

on vaping in 2019, bringing the total number of states with such taxes to 20 plus the District of

Columbia.

E-cigarettes are themselves relatively new, and states have struggled to determine if and how to tax

them, though many have not hesitated to move forward even with uncertainties. When smokers

shift to vapor products, this reduces cigarette tax revenue, but given that a stated purpose of

most tobacco taxes is to improve health outcomes and reduce health-related expenditures, the

harm reduction associated with these alternative products must be taken into account. Taxing

vapor products identically with, or even more heavily than, traditional tobacco products creates a

disincentive for smokers to shift to a less harmful product.

23 New Hampshire H.B. 480 (2019).

TAX FOUNDATION | 18

Vapor taxes come in two varieties: specific taxes based on the volume of e-cigarette liquid, in keeping

with the standard approach to excise taxation, or ad valorem taxes on the wholesale price. Excise

taxes are generally designed to price externalities (user fee) or disincentivize a transaction (sin tax),

or both. Specific taxes make more sense in either case, as the nature of the purchase, not its cost, is

the relevant factor; potential harm is not predicated on price. Imposing ad valorem taxes incentivizes

the purchase of lower-cost and perhaps lower-quality products, and the resulting revenue is less

predictable for states.

Nevertheless, many states choose to impose ad valorem taxes, using price as a proxy for different

potencies. As a superior alternative, states can—and sometimes do—set two specific rates, one for

closed tank systems that have higher nicotine levels per milliliter, and another for open tank systems

with a lower nicotine concentration.

In 2019, Connecticut and New Mexico implemented bifurcated excise taxes which taxes open

systems on an ad valorem basis and closed systems on volume. Washington now taxes open and

closed tank systems at different specific rates (9 and 27 cents, respectively), while Ohio and

Wisconsin impose specific excise tax rates that apply equally to all systems. The remaining states—

Illinois, Maine, Massachusetts, New York, Nevada, and Vermont—all adopted ad valorem taxes on

vapor products in 2019.

TABLE 6.

New Excise Tax Rates on Vapor Products, 2019

State Tax Rate(s)

Connecticut $0.40 per ml. closed tanks

10% wholesale other vapor products

Illinois 15% wholesale

Maine 43% wholesale

Massachusetts 75% wholesale

Nevada 30% wholesale

New Mexico $0.50 closed tanks

12.5% wholesale open tanks

New York 20% retail

Ohio $0.10 per ml.

Vermont 92% wholesale

Washington $0.09 per ml. open tanks

$0.27 per ml. closed tanks

Wisconsin $0.05 per ml.

Sources: State statutes; Tax Foundation research.

In 2018, vapor taxation was mainly a matter of revenue, with states seeking to capture some of the

lost revenue as some smokers transitioned to vapor products. This is not to deny that health was

a consideration, but vapor products were largely seen as harm reduction products compared to

traditional cigarettes. In 2019, deaths linked to (mostly counterfeit and THC-laced) vapor products,

along with escalating opposition to flavored products deemed more attractive to children (recently

24 Ulrik Boesen, “Vaping Taxes Should Be Carefully Designed,” Tax Foundation, Sept. 12, 2019, https://taxfoundation.org/vaping-taxes-carefully-designed/.

TAX FOUNDATION | 19

restricted by the Trump administration), emerged as a more significant basis for taxation along with

regulatory constraints, even though higher taxes might expand the appeal of black market products.

From this arises the major uncertainty for 2020. Vapor products will undeniably be at the forefront

for many legislators this year, though there may be competing impulses—taxing for revenue versus

taxing to restrict access, or instead limiting or banning vapor products altogether.

25 Jamie Munks and Dan Petrella, “Gov. J.B. Pritzker signs bills that ignite $45 billion construction program, massive gambling expansion and doubling of

gas tax,” Chicago Tribune, June 28, 2019, https://www.chicagotribune.com/politics/ct-jb-pritzker-gambling-construction-bills-gas-tax-signed-20190628-

inux5umelbewje5zzdrpphz3ze-story.html.

FIGURE 3.

Gas Tax Increases

States continue to adjust their motor fuel tax rates, which had long eroded due to inflation. Today, a

growing number of states automatically index their gas taxes to inflation or, less ideally, incorporate

wholesale gasoline prices into the rate calculation. Four states—Alabama, Arkansas, Illinois, and

Ohio—adopted new rate increases in 2019, and Tennessee implemented the second stage of a rate

increase that began in 2018. The largest increase was in Illinois, where the excise doubled from 19 to

38 cents per gallon and will henceforth be indexed for inflation.

Recreaonal Marijuana and Vapor Tax Rates

State Recreaonal Marijuana and Vapor Excise Tax Rates, Janauary 1, 2020

TAX FOUNDATION

Note: CA, IL, MA, ME, MI, NV, and WA levy their marijuana sales taxes in addion to the state

sales tax. Colorado and Nevada have an excise tax levied based on the average market wholesale

price, which is set by the state Department of Revenue and excludes local taxes. District of

Columbia voters approved legalizaon and purchase of marijuana in 2014, but federal law

prohibits any acon to implement it. In 2018, the New Hampshire legislature voted to legalize the

possession and growing of marijuana, but did not permit sales. Alabama, Georgia, Idaho, Indiana,

Iowa, Kansas, Kentucky, Louisiana, Minnesota, Nebraska, Oklahoma, Rhode Island, Tennessee,

and Wisconsin impose a controlled substance tax on the purchase of illegal products.

Source: Bloomberg Tax; Vapor Products; state statutes.

Has a Marijuana Excise Tax

Has a Vapor Excise Tax

95% of

wholesale

sales tax

$0.05/ml

10% of retail open

$0.10/ml closed

92% of

wholesale

96% of

wholesale

95% of

wholesale

17% sales tax

12.5% of

$0.50/cartridge

wholesale open;

closed

$0.05/ml

$0.075

/ml

$0.05/ml

40% of

wholesale

43% of

wholesale

15% excise tax

10% sales tax

15% excise tax

15% sales tax

$0.05/ml

$0.10/ml

10% of;

$0.40/ml closed

wholesale open;

20% of

retail

15% sales tax

$9.25/oz ﬂowers &

$2.75/oz leaves of

culvaon tax

$1.29/oz fresh

cannabis plant

Vapor: 59.27%

of wholesale

$50/oz mature ﬂowers

$25/oz immature ﬂowers

$15/oz trim; $1 per clone

37% sales tax

Vapor:

$0.09/ml open

$0.27/ml closed

Vapor:

30% of

Vapor:

75% of

wholesale

10.75%

wholesale

7% of wholesale & addional 10%

on cannabis ﬂowers or products with

less than 35% THC, 20% on edibles,

and 25% on products with 35%

+ THC5% of wholesale

Vapor:

15% of wholesale

TAX FOUNDATION | 20

Other Tax Issues

The estate tax continues to die a slow death, while changing energy markets may force difficult

choices on some states.

Declining Estate Tax Burdens

Until 2005, taxpayers received a federal credit for state inheritance and estate taxes paid, essentially

rendering them (up to a certain limit) a way for states to raise additional revenue at no additional cost

to their taxpayers. Since the phaseout of that provision, states have been moving away from estate

and inheritance taxes, a trend that continues unabated. Before the credit’s repeal, all 50 states had an

estate or inheritance tax. Today only 17 do, following the repeal of estate taxes in Delaware and New

Jersey in 2018. (New Jersey also imposes an inheritance tax. With estate tax repeal, Maryland is now

the only state to impose both an inheritance and an estate tax.)

As part of the Tax Cuts and Jobs Act, the federal exclusion amount was doubled to $11.58 million as

of 2020 (an inflation-adjusted $10 million), which in turn prompted higher exemptions in a number

of states which conform to federal provisions. There is a growing realization, moreover, that estate

taxes can be counterproductive, driving high-net-worth retirees (who tend to be highly mobile) out of

state, thus losing not only the potential estate tax revenue, but also years of income, sales, property,

and other tax collections. Estate taxes are thus highly inefficient, since the revenue comes at a cost of

reduced investment by (and tax liability for) high-net-worth individuals due to outmigration.

For now, some states with thresholds below the new federal level are raising their own exemptions. In

a recent policy development, for instance, Connecticut now matches the old federal level as of 2020

and will continue to phase in the new, higher exemptions. The result of prior legislation, Minnesota’s

estate tax exemption rose to $3 million in 2020, and Vermont’s rose from $2.75 million to $4.25

million.

Other states are likely to follow. Longer term, there is every reason to expect that more

states will follow in the footsteps of Delaware, New Jersey, and those that have already abandoned

these taxes.

Comprehensive Reform

Recent years have witnessed the return of comprehensive tax reform in its most robust form since

at least states’ responses to the Tax Reform Act of 1986, if not earlier. Whereas lawmakers once

preferred to tackle one tax at a time, increasingly reform has gained additional viability by becoming

broader, not narrower, permitting necessary trade-offs and benefiting a wider range of taxpayers.

States like Arkansas, Indiana, Iowa, North Carolina, and Utah are indicative of this trend, and in 2019,

Utah adopted a reform package affecting multiple taxes (touching individual income taxes, corporate

income taxes, sales taxes, and excise taxes) for the second time in 12 years. States do continue to

pursue discrete changes to a single tax, but policymakers have come to see benefits in addressing

multiple taxes at once rather than conducting an overhaul of one tax at a time.

26 Jared Walczak, “State Inheritance and Estate Taxes: Rates, Economic Implications, and the Return of Interstate Competition,” Tax Foundation, July 17, 2017,

https://taxfoundation.org/state-inheritance-estate-taxes-economic-implications/.

27 Katherine Loughead, “State Tax Changes as of January 1, 2020.”

TAX FOUNDATION | 21

Revenue Challenges in Energy States

No state has adopted a new income tax since 1991, nor a new sales tax since 1969,

but that streak

could be threatened in coming years, particularly as resource-intensive states struggle to cope with

changing energy markets. In 2019, Wyoming’s joint revenue committee referred legislation creating

a corporate income tax for consideration in the 2020 legislative session.

Steeply declining oil

and gas revenues are generating talk of a possible sales or even individual income tax in Alaska.

Montana does not meet in legislative session in 2020 but will use the off year for a tax study which

might consider the adoption of a state sales tax to permit reforms to other taxes.

More broadly,

states which rely heavily on severance taxes or property taxes on those industries are increasingly

experiencing revenue contractions and lowering their expectations for coming years.

Conclusion

The year 2019 was an eventful one in the realm of state taxation, but no slackening should be

expected soon—not even in states’ responses to the major upheavals of 2018 (Wayfair and the TCJA,

and to a lesser extent Murphy). State interest in taxing remote sales and legalizing and taxing both

sports betting and marijuana should continue unabated. While most states now conform, at least in

part, to the new federal tax law, many important considerations, from how to handle the international

provisions to what to do with the revenue, will continue to occupy lawmakers’ attention in 2020.

States are only now figuring out their marketplace facilitator laws, and revisions are likely.

Long-term trends, like the declining importance of corporate income taxes and starker economic

implications of retaining an estate tax, will continue to figure into states’ tax considerations. In recent

years, moreover, tax plans have increasingly been comprehensive, reforming multiple taxes at once

rather than being limited to a single tax. Often previously considered too daunting, comprehensive

reform is increasingly viewed as more practical, as it allows reforms to be balanced against each other.

The future of state taxation no doubt holds a few surprises, but a key to many future developments

can be found in the experience of other states. Policymakers would do well to pay attention to the

experiences of their peers—to learn from their mistakes as well as their successes.

28 Advisory Commission on Intergovernmental Relations, Significant Features of Fiscal Federalism, Volume 1, September 1995, 32, https://library.unt.edu/gpo/

acir/SFFF/sfff-1995-vol-1.pdf.

29 Jared Walczak, “Throwback, Pricing Strategies, and a Wyoming Corporate Tax,” State Tax Notes, July 22, 2019, https://www.taxnotes.com/lr/resolve/

tax-notes-state/throwback-pricing-strategies-and-a-wyoming-corporate-tax/29pyf.

30 Andrew Kitchenman, “Budget Scenarios Include ‘Balanced Approach’ That Draws Interest,” Alaska Public Media and KTOO-Juneau, Dec. 18, 2019, https://

www.alaskapublic.org/2019/12/18/budget-scenarios-include-balanced-approach-that-draws-interest/.

31 Corin Cates-Carney, “Montana Lawmakers Plan Tax Policy Review,” Montana Public Radio, May 22, 2019, https://www.mtpr.org/post/

montana-lawmakers-plan-tax-policy-review.