Grant Thornton’s state and local tax practice has issued a set of predictions for 2017, including how states will be taxing online purchases and dealing with budget shortfalls.

Quarterly combined state tax revenue

“For a variety of reasons, you have a lot of states where this is the year where they’re either going to have to consider significant tax rate increases or sales tax base expansions, or do something else to make the books work,” said Jamie Yesnowitz, principal and SALT-national tax office leader at Grant Thornton LLP.

He predicts that at least three states facing budget difficulties are going to try to solve those issues by expanding the sales tax base, and at least one state will need to raise corporate income tax rates. “That stands counter to what we’ve seen in the last couple of years where you have had a lot of states pushing the tax rates on the corporate income side down,” Yesnowitz pointed out.

He predicts that between 20 and 30 states will have budget gaps over the course of the next year that they will need to deal with this year, for a variety of reasons. Some states are dependent on natural resources such as oil and gas, and when the prices of those commodities fall, their tax revenue base declines. Some states that have pushed tax reform efforts have been unsuccessful in spurring enough growth to bring in more revenue.

“They have to reconsider what they’re doing and potentially tweak the tax reforms that they’ve put into place,” said Yesnowitz. “You have other states like Illinois and Pennsylvania that have had significant political issues with the legislature and governors not getting along well. It has been a challenge for those states to just get budgets overall. Then you have states like Kansas that have tried to cut their corporate income tax rates for some time, thinking that would result in an economic driver, and that hasn’t happened for them.”

Even some red states with Republican legislatures and governors may need to increase taxes to make up for their budget shortfalls, he believes, even though Republicans have traditionally opposed raising taxes.

On the sales tax side, Grant Thornton expects to see more diligence in collecting sales tax and an expansion in taxing services, particularly in states with budget gaps.

State tax reform efforts will also be influenced by what happens in Washington, where the prospects for tax reform on the federal side is high if the incoming Trump administration can work successfully with a Republican-dominated Congress.

“We have a new administration coming in and you have House Republicans and Senate Republicans, so the opportunity for federal income tax reform is pretty significant,” said Yesnowitz. “Will it happen? We don’t know, but if it does, there certainly could be some implications for the states. On the federal side, there’s been lots of talk about a destination-based cash flow tax. If it gets adopted, what that would likely do is increase the tax base and lower the tax rate. With an increased income tax base, that’s something states would probably view as a good thing if that would increase their revenues.”

On the other hand, some states may decide to part ways from federal tax policy in some respects if they find they’re losing the revenue they need.

“If you go through a federal tax reform effort that increases the base to some extent and decreases the base to some extent, states might look to the areas where they’re decreasing the base and decouple from those provisions,” said Yesnowitz. “Over the last 10 to 15 years, states have been very reticent to pick up federal changes that impact their base. Bonus depreciation is a perfect example of that. For the 199 deduction and the domestic production activities deduction, you have a lot of states that decouple from that as well. States might decide to conform to the federal provisions that simply add to the base and decouple from the provisions that detract from the base.”

Local Tax Changes

On the local tax side, Yesnowitz is seeing some changes in municipalities that are taxing sugar-sweetened drinks to improve health and raise more tax revenue.

“A lot of municipalities have decided to go for these sugar sweetened beverage taxes and the like,” said Yesnowitz. “One of our predictions does relate to this. We think that a couple more municipalities out there are going to impose a tax on soft drinks and sugar additives in the coming year. Philadelphia did that in the last year, and we expect more action on that front. The state of Illinois proposed that provision in their initial budget negotiations that will move into 2017. We expect some of the big cities to keep going down this path as they see their budgets being pressed.”

Some localities are also imposing taxes on plastic bags. “I’m in Montgomery County, Maryland, and we have a bag tax,” said Yesnowitz. “D.C. has a bag tax. One would expect more of those types of taxes, or fees as they call them, to proliferate as we continue to be conscious about what’s going on in the environment with respect to these bags. It’s an environmental initiative.”

Online Commerce Taxes

A recent court case could encourage some states to tax online commerce sales more aggressively and expand the physical presence and nexus rules that have been in place since the Supreme Court’s 1992 landmark decision in the case of Quill Corp. v. North Dakota. Efforts to pass federal legislation such as the Main Street Fairness Act through both houses of Congress have been unsuccessful to date.

Last month, the Supreme Court declined to take up a case involving a lawsuit by the Direct Marketing Association against a Colorado law requiring tax reporting on use taxes by out-of-state sellers. The Tenth Circuit Court of Appeals had upheld the tax-reporting regime, so the Supreme Court effectively left the appeals court ruling in place.

“In the last couple of years, as it’s become apparent that the courts and Congress are not going to act with respect to changing the rules regarding remote sellers with respect to the physical presence rule, states have taken this issue into their own hands in a variety of ways,” said Yesnowitz. “They’ve offered up legislation, saying that if you’re a remote seller that doesn’t have physical presence in a state, you have to comply with notice and reporting requirements. We saw some action in that area in the past couple of years. The DMA [Direct Marketing Association] case was the big case that went through the Colorado and the federal [court] systems. Because the U.S. Supreme Court decided not to hear the DMA case, that was a victory for the state of Colorado. As a result we expect to see a few states copying the Colorado model, which requires a notice to consumers saying they have to pay use tax on items where you don’t pay sales tax because the remote retailer or remote seller doesn’t have any physical presence. The remote retailer also has to fill out a monthly and then a yearly report to the Department of Revenue, reporting all of the transactions that occurred with customers in their marketplace. Now the fact that the Supreme Court hasn’t heard this case, to a lot of states this might mean that notice and reporting requirements might be something that’s defensible, so we expect a few states out there to follow that.”

Apart from the notice and reporting requirements, some states are directly challenging the Quill decision through legislation and litigation, saying a remote seller that has more than a certain number of transactions or a specific amount of sales in a state are automatically subject to that state’s sales tax collection and remittance responsibilities. “We’re going to see more activity on that front,” said Yesnowitz. “The legislation is likely to come quicker than the litigation on that front, because when you litigate issues like this, typically it takes several years for the litigation to be fully settled throughout the system, whereas legislation you can just put through in one legislative session and, voila, you have a statute.”

Michael Cohn

Michael Cohn, editor-in-chief of, has been covering business and technology for a variety of publications since 1985.