Although state sales tax rates have not risen during the pandemic, new city and district sales taxes have risen rapidly for the first half of this year.
“On a macro level, a lot of states experienced a huge drop in sales tax revenue when their economies took a hit,” observed Mike Bernard, chief tax officer at Vertex. “The shutdowns especially affected the transportation, hospitality and energy sectors in states where these predominate. Nevertheless, not one state upped its sales tax rate.”
States are reluctant to raise their sales tax rates because they know that the increase in sales tax can be regressive, he explained. “That’s been true for the last 20 to 25 years. We saw the same thing during the recession of 2007-2009. However, changes below the state level have been abundant,” he said, citing the Vertex Mid-Year Report.
“Despite receiving massive amounts of federal aid in March 2021, we saw a flurry of activity from state and local legislative bodies just before legislators left for summer recess. Certain states that rely on taxes generated by energy, transportation and tourism, in particular, still face significant budget gaps. Indirect tax teams need to keep on top of new and shifting rates as the pandemic continues to affect tax revenues,” he said. “We expect the frequency of new and changed city and district sales taxes to continue.”
Bernard noted that almost $350 billion in federal aid was targeted to state and local governments for pandemic relief, but over the last 40 years, revenue sharing has not gone from federal to state to local bodies. “The locals are on their own, and they bear the brunt of services that are required,” he said.
When faced with a budget gap, local jurisdictions have a choice between cutting services, cutting personnel or raising taxes, Bernard observed: “They used everything they had in their toolbelt. New geographic districts have proliferated, including fire, water, and other special-purpose districts. That’s why you might see five taxes on your sales receipts.”
Tax professionals should note the following, according to Bernard:
- In the first six months of 2021, there were 127 new geographic district sales taxes, up from 88 in the first six months of 2020. This trend continued in July 2021, with 36 new district taxes enacted.
- Many new city sales taxes were also enacted, with 23 new city taxes going into effect for the first six months of 2021. And in July 2021, an additional 22 new city sales taxes went into effect.
- City sales tax rate changes rose sharply in July, with 54 city rate changes, up 32 from the average of 22 per month for the first six months of the year.
States and localities that have relied heavily on energy, transportation or hospitality will be disproportionately affected as we head into fall because of the COVID variants, Bernard suggested. “The numbers for hiring hospitality workers fell in August,” he said. “Conferences have been cancelled, and business travel is not coming back yet. Companies are not bringing people to their headquarters so often, and trade shows are at 25% to 30% of where they were. Even those going back are doing so cautiously.”
The activity of many vendors to establish their own marketplace is a significant trend, according to Bernard: “Amazon sells its own brands, and also hosts millions of third parties. Now that model is moving downstream to smaller corporations and midmarket companies. They feel that if Amazon can do it, so can they. They want the business intelligence that comes with people being on their website. They want to see where customers click and point, and eventually purchase or not.”
“Consequently, we have a lot of requests from smaller businesses to build tax calculations into a marketplace on their website,” he continued. “For example, if they’re selling software they might put hardware vendors on their marketplace so they can buy a server — they match what they sell with other vendors on their website.”
Bernard also sees a trend toward tax departments that want to outsource tax returns that they would normally do in house. “A lot of corporate tax departments now have a charter from the CFO to automate highly repetitive processes,” he explained. “Everything can be automated now — from an initial order to fulfillment to shipment to accounting to tax returns to cash.”
“Various forms of digital taxation, potentially including the enactment of new taxes for streaming video and music services, are likely to feature prominently in near-term tax policy discussions,” Bernard predicted. “U.S. policymakers on both sides have proposed or are considering the taxation of companies in the form of digital advertising, social media, and data taxes after Maryland enacted the nation’s first tax on digital ads earlier this year.”
