State and local governments in the U.S. are relying increasingly on transaction-based taxes rather than income-based taxes to fill their coffers, as they are easy to implement and provide reliable revenue, according to a recent report from tax technology company
Specifically, the report said states have come to recognize that, relative to income-based revenue streams, transaction-based levies like sales taxes are less vulnerable to adverse economic cycles, are generally easier to administer and audit due to lacking the many complex provisions of income tax systems, and they're easier to expand by either implementing new or higher rates, which allows easy adaptation to new income streams like digital products. For example, Washington State has proposed legislation that would impose a tax on the sales or exchange of personal data equal to the gross income of the business multiplied by 1.8%.
The report also noted that technology-enabled advancements like real-time monitoring and digitization of registrations has also made it easier for governments to implement transaction-based taxes.
The report pointed out that, in the last year alone, 197 new district taxes have been implemented, the second highest jump in the last decade. They were enacted to fund everything from community improvements to transit upgrades to emergency services. The majority, 85%, of these new taxes were imposed at the city and county levels; the report said this trend has continued into this year, with 23 new distract taxes imposed in the first two months of the year. Overall, Vertex believes there are 2,743 district taxes.
“Businesses may be affected by not being able to import certain products and are shifting to regional suppliers, which could change the obligation to collect and remit sales taxes or VAT in new jurisdictions,” said Vertex chief tax officer and vice president of tax content Michael Bernard in a statement. “Companies are also establishing hybrid working policies to attract and retain staff, which can also change the nexus footprint.”
