The number of changes in sales tax rates across the U.S. increased by more than 40% through June 30, compared to the same period last year. The newly released Vertex 2023 Mid-Year Sales Tax Rates and Rules Report shows that the number of new district rate changes soared during the first half of the year. And not all of the rate changes were increases — in fact, the majority of the changes were decreases, the report found.
"This proves once again that agility will be crucial for businesses to meet their compliance obligations," said Mike Bernard, chief tax officer and vice president of tax content at Vertex.
During the first half of 2022, there were a total of 302 new sales taxes and tax rate changes at the state, county, city and district levels. This year, that total increased to 431 — a 43% bump.
Driving this increase is a surge in new taxing cities, with 37 so far in 2023 compared to 22 in the first half of 2022. A large increase was in district-level sales tax rate changes, with 148 so far this year versus 37 in the first half of 2022, according to the survey. The volume of those changes complicates tax compliance activities for the sales and use tax community.
There are myriad reasons why state and local government organizations have been increasingly relying on sales taxes to fund ongoing operations. Among other things, sales taxes tend to be easier to administer and collect. Over the past 60 years, in times of adverse economic cycles, sales taxes have provided a more resilient method of funding relative to income and property taxes.
"Tax groups must continue to be agile to ensure their organizations address the growing number of indirect taxes that states and other local jurisdictions are enacting," said Bernard. "It is important for tax professionals to monitor what is driving all of these changes as they navigate the ever-shifting indirect tax landscape."
The dynamics and trends that are impacting sales tax and rates changes and the driving forces behind them include the following, according to Bernard:
- Taxing districts require more funding. Through the first half of this year, 101 new district taxes, such as fire, rescue and parks, have come online. This explosion in new district taxes is about funding. Districts have seen the cost of goods and services compound due to inflation over the past several years. Issuing additional debt is more challenging today because interest rates have risen and are likely to stay high for sometime. All of this means that taxing districts are expected to continue to enact new taxes to address their revenue needs.
- Exemptions are also increasing. It is vital to keep documentation of exemptions, Bernard noted. "Audit activity is back to prep-pandemic levels," he observed. State legislatures continue to introduce an assortment of temporary and permanent state tax exemptions. Combined with a related desire to limit income tax and property tax rate increases, the growing use of exemptions is accelerating the narrowing of the state tax base. This places greater pressure on sales and use taxes as a driver of revenue for state and local tax jurisdictions. "Sales tax exemptions pose a range of challenges to indirect tax groups and other stakeholders," he said. "If you don't have documentation for an exemption, they will presume it's taxable. There must be an exemption certificate — auditors start with exemptions, not with sales."
- Tax holidays. According to the Tax Foundation, tax holidays generally don't increase economic activity because they are targeted toward items consumers will necessarily purchase. Because most holidays are temporary, they only complicate sales and use tax compliance for businesses.
- A "fee-for-all" trend also requires attention. Fees in addition to sales tax have become a popular method of funding for state and local jurisdictions, according to Bernard. "Environmental 'green' fees have grown substantially over the past several years and that trend continues. So far this year, states including Maryland, Maine, Oregon, Colorado and California have enacted legislation that attaches new environmental fees to plastic, paper, glass, and metallic packaging materials," he said. "Vertex solutions currently support upwards of 1,000 different fees, the majority of which are 'green' fees. Beyond that, state and local jurisdictions continue to come up with new fees, including airport and retail delivery fees."
While the Vertex Rates and Rules report focuses solely on U.S. sales and use taxes and fees, a significant amount of legislative and policy work is being considered around value-added tax, according to Bernard.
"VAT generally focuses on e-invoicing and marketplaces and much of that legislative activity will produce significant changes toward the end of calendar year 2023," he said. But stay tuned: "We will be back writing on the progress of these items in the fall."
