Top State Tax Policies You Can Expect to Deal With in 2021
Fiscal fallout from the pandemic takes hold

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When states began their 2021 fiscal year budget processes in early 2020, just about every state anticipated revenue growth consistent with what it had seen in recent years. Most states had robust rainy-day funds, and some were looking at options to lower taxes. As we fast-forward to early 2021, few states are in the same place. The fiscal fallout of the pandemic hit states hard—although not as hard as initially expected. In the spring of 2020, state revenue forecasts were dismal. Although the forecasts improved in late 2020, they are still not rosy.

Stimulus spending from the federal government helped prop up economic activity throughout 2020, which helped state budgets by stabilizing personal income tax and sales tax revenue. Stocks have performed well, and some businesses prospered during the pandemic, which also shored up many state budgets. Increased sales tax collection on remote sales after Wayfair also helped many states. These factors helped stabilize many state coffers as the pandemic lingered. For example, California projected a $54 billion shortfall in the spring of 2020, but then projected a $15 billion surplus in the fall.

Despite the revenue uptick, significant fiscal uncertainty exists as the world still reels from the impact of the pandemic. Most experts expect state shortfalls to continue. The Brookings Institution estimated in December 2020 that state shortfalls would total $350 billion from fiscal years 2020 through 2022. Much of the shortfall stems from decreased revenue, but states also face unanticipated spending in areas such as unemployment benefits, health care, remote schools, and vaccine distribution.

With this backdrop in mind, this article discusses the state tax policy implications we expect to see in 2021. If 2020 was an unusual year for state legislatures, 2021 will be as well. Many states adjourned early in 2020 without fully addressing revenue shortfalls. As they reconvene in 2021—many in mostly virtual settings—state legislatures face unprecedented uncertainty. Whether significant tax changes will address that uncertainty considerably remains to be seen. Several variables, including whether the federal government will throw the states a lifeline, will impact state tax policy in 2021 and will likely carry into 2022. Complicating matters, state legislatures must also balance the need for additional revenue against the impact new or increased taxes will have on businesses that are already struggling with the impact of the pandemic. And, of course, state legislatures have to accomplish this task while passing a balanced budget.

Despite these difficulties, it is expected that most states will consider changes to state taxes. The changes range from gimmicks to new targeted taxes.

Gimmicks Galore

States often turn to gimmicks and other measures to close short-term revenue gaps. Some measures have no impact on taxpayers, like moving earmarked revenue among funds, tapping rainy-day funds, or offering amnesties. However, many gimmicks do affect taxpayers, like acceleration of sales tax remittance to move tax collection from one fiscal year to another.

The Massachusetts governor’s budget proposals in recent years have contained a “sales tax modernization” initiative that included a real-time sales tax remittance requirement. This requirement would have dramatically affected retailers and credit card transaction processors. The proposal would require third-party payment processors to remit the portion of charges identified by vendors as tax to the Department of Revenue on a daily basis. The compliance cost for retailers and processors would be significant, and many issues stemming from this model could not be solved by a compliance system alone.

Several other states have considered some form of accelerated sales tax remittance in recent years, including Arizona, Connecticut, Missouri, and New York. This trend could continue as states seek to identify and implement avenues for sales tax modernization and revenue acceleration. These proposals raise concerns for taxpayers and states alike, including substantial implementation costs.

As an alternative to real-time collection, Massachusetts ultimately adopted a provision that would accelerate sales tax collection so that collected sales tax must be remitted before the end of each month. Retailers that collected more than $150,000 in sales tax or room occupancy and meals tax in the previous calendar year will need to remit the sales tax for the first three weeks of each month in the final week of that month. In prior economic downturns, Texas, Virginia, and other states enacted similar temporary measures. This option will likely be on the table in many states’ upcoming legislative sessions as a revenue-raising opportunity.

Quick Fixes

During past economic downturns, states have turned to temporary quick fixes to solve budget woes. The same should be expected in 2021. One example of a quick fix is the temporary suspension of net operating loss (NOL) carryforwards and credits. During economic downturns in the 2000s, several states enacted these temporary measures. We have seen some discussion in states about similar measures after the onset of the pandemic, and one state has already acted.

California suspended the use of NOLs and credits in 2020. Specifically, AB 85 suspended the use of NOLs for business taxpayers with net business income of $1 million or more during tax years 2020 to 2022. The bill also limited the amount of business tax credits that taxpayers can claim annually to $5 million during the same period, tax years 2020 to 2022. The business tax credit cap applies to specific California tax credits, including the research tax credit, the California Competes Tax Credit, the jobs tax credit, and the motion picture tax credits.

Sales Tax Base Expansion

Some states will consider proposals this year to broaden the sales tax base—either in the form of a broad expansion or a narrow expansion to include specific items. It is unlikely that any state will enact a broad base expansion. Rather, states are more likely to add additional goods and services to the sales tax base.

State legislators are often lured by the possibility of broadly expanding their sales tax base to include items and services not currently taxed while at the same time lowering the sales tax rate. Although appealing, broad expansions are difficult to accomplish. Utah’s recent attempt to broadly reform its sales tax illustrates the steep hurdles these proposals face.

Utah passed sweeping tax reform legislation in December 2019, only to repeal it a month later. The reform included both tax hikes and tax cuts. It expanded the state’s general sales tax base to cover a few new services, such as landscaping, limousines, yoga studios, and digital goods. It also increased the state’s sales tax rate on groceries, but lowered the general sales tax rate. The legislation also reduced the state’s flat corporate and individual income tax rates. The net effect of the reform was a reduction in taxes. During a special session in December, the legislature quickly passed the reform, which was partially based on a study commission. Voter pushback was instant and focused on the grocery tax hike.

Opponents immediately began collecting signatures for a repeal referendum—often outside grocery stores. As the signatures opponents gathered approached the number required to make the November 2020 ballot, the legislature itself repealed the law—with a nearly unanimous vote—in its first action in January 2020.

Utah provides a great example of how difficult it is to broadly expand the sales tax base, but some smaller sales tax base expansions should nonetheless be expected. In recent years, base expansion has targeted personal services and new technology, like streaming video and music. Taxpayers should expect to see the same in 2021.

New Targeted Taxes

A number of companies that may have performed well during the pandemic could find their businesses in the sights of state lawmakers. New favorite targets seem to be social media platforms and sellers of digital advertising. In 2020, Maryland became the first state to vote for a new tax targeted at digital advertisers. Other states have already introduced several variations of similar taxes in 2021.

Last year, Maryland HB 732 passed the Maryland legislature with a veto-proof margin, but the governor vetoed it after the legislature adjourned. However, it is expected that the legislature will consider overriding that veto in early 2021. The new tax is imposed on the annual gross revenues derived from digital advertising services in Maryland. The definition of “digital advertising services” broadly includes “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” The tax rate varies from 2.5 percent to ten percent of the annual gross revenues derived from digital advertising services in Maryland, but the rate depends on a taxpayer’s global annual gross revenues. To be required to pay the tax, a taxpayer must have at least $100,000,000 of global annual gross revenues, and at least $1 million in Maryland annual gross revenues derived from digital advertising services.

Determining whether digital advertising taxes are “in Maryland” has proved to be problematic. The introduced version of the digital advertising tax proposed to source (and tax) digital advertising services to Maryland based on either 1) the user’s IP address or 2) the knowledge or reasonable suspicion that a user is using the device (that receives the advertising) in the state. However, the final version of the tax strikes these provisions. Instead, the legislation directs the state comptroller to adopt regulations that will entirely determine how to source digital advertising service revenues to the state.

Although the tax targeted large advertising platforms, the burdens of these taxes are likely to fall ultimately on Maryland’s small businesses and consumers who are already being hit hard by the struggling pandemic economy. Maryland legislators will consider this factor as they weigh options for overriding the veto.

Other states will undoubtedly consider taxes similar to Maryland’s. Some of these taxes have already been introduced. This January, a New York senator introduced S1124, which would impose a new gross revenues tax on digital ads. The tax would be imposed on the annual gross revenues any person derives from digital advertising services apportioned to the state based on digital advertising receipts. The bill defines “digital advertising services” to include “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services, that use personal information about the people the ads are being served to.” Depending on the taxpayer’s global annual gross revenues, the tax rate would vary from 2.5 percent to ten percent. Separate legislation was previously filed in the New York Senate that would instead expand the sales tax base to digital advertising services.

A bill pending in Indiana would impose a surcharge tax on social media providers deriving revenue from advertising services on their platforms of at least $1 million and does not contain a tiered rate structure. The surcharge is equal to 1) the annual gross revenue derived from social media advertising services in Indiana in a calendar year multiplied by seven percent plus 2) the total number of the social media provider’s active Indiana account holders in a calendar year multiplied by one dollar. A “social media provider” is defined as a social media company that 1) maintains a public social media platform; 2) has more than one million active Indiana account holders; 3) has annual gross revenue derived from social media advertising services in Indiana of at least $1 million; and 4) derives economic benefit from the data individuals in Indiana share with the company. The bill defines “social media advertising services” as advertising services that are placed or served on a social media platform. The term includes advertisements in the form of banner advertising, promoted content, interstitial advertising, and other comparable advertising services.

The bill apportions gross revenue to Indiana by using an allocation fraction, the numerator of which is the annual gross revenue derived from social media advertising in Indiana, and the denominator of which is the annual gross revenue derived from social media advertising in the United States during the calendar year.

HB 2392, which is pending in Oregon, would impose a five percent gross receipts tax on the sale in Oregon of “taxable personal information” of individuals located in the state. The definition of “personal information” (PI) includes “information that identifies, relates to, describes or is capable of being associated with an individual.” The definition also provides a laundry list of information that could qualify as PI (for example, names, physical addresses or other location information, telephone numbers, email addresses, IP addresses, signatures, physical characteristics or descriptions, biometric data, driver’s license numbers, state identification card numbers, passport numbers, Social Security numbers or other government-issued identification numbers, bank account numbers, debit card numbers, credit card numbers or other financial information, insurance information, medical information, employment information, educational background information, browser habits, consumer preferences, and other data that can be attributed to individuals and used for marketing or determining access and costs related to insurance, credit, or health care). The bill specifically carves photographs out of the definition of PI. “Taxable personal information” is defined as “personal information accumulated from the internet.”

If any of these new taxes is enacted, legal challenges will certainly follow, since these taxes may violate federal statutory and constitutional law, including the Internet Tax Freedom Act and the Commerce Clause.

Usual Suspects

Several states will also consider corporate income changes that are typically introduced throughout the legislative session. Separate return states continue to explore opportunities to enact mandatory combined reporting. In recent years, Maryland, Pennsylvania, and Virginia have all seriously debated combined reporting. The issue is expected to be an option this year in multiple states. Some states will also consider changes to their apportionment formula, like enacting a single sales factor formula or market-based sourcing.

States will also have to deal with conformity to the Tax Cuts and Jobs Act (TCJA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Many states adjourned in 2020 without addressing whether they would conform to the tax provisions in the CARES Act and will need to address them this legislative session. As states begin to audit the first returns filed post-TCJA, issues are arising with state conformity to the TCJA’s provisions, like global intangible low-taxed income (GILTI). Some states may need to revisit TCJA conformity in 2021.


As the pandemic continues to impact state revenues in some areas, states will almost certainly need to act in some measure as the nation starts to recover. With the increasing likelihood that a federal stimulus package may temporarily help states, there is still much uncertainty as to whether states will act on significant tax measures in a 2021 session. At the time of this writing, several state budgets have been introduced. Many do not contain significant changes. If states do not act to cure revenue shortfalls in 2021, they will certainly be expected to put tax issues front and center in 2022.

Todd Lard is a partner and Charles C. Capouet is an associate at Eversheds Sutherland.

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