Consumer economics and sales taxes: ripples in (un)still waters

All commerce is vulnerable to trade flows and subsequent price-level adjustments, resulting in sales volatility. While today we are all minding prices, it’s often easy to forget the indirect tax rate on seemingly simple purchases links global economic conditions and fiscal domestic pressures. 

These continual “ripple” effects have major impacts on how tax groups manage indirect tax, so it’s worth keeping in mind that state-level budgets and revenues are mostly reactionary in nature, irrespective of planning. Their stability, or lack thereof, is the result of numerous external economic and fiscal factors that indirect tax leaders should monitor, including: 

• Variable inflation and related interest rate decision: The most recent consumer price index (CPI) report showed, that inflation, while it has gradually diminished, remains stubbornly persistent. This likely delays the Federal Reserve’s plan to pivot and reduce interest rates, and keeps in play a wide range of potential outcomes, including a tighter job market and a potential recession of varying severity. All of this volatility creates uncertainty and risks, while the elusive “soft-landing” remains possible. After all, inflation is also a surtax.
• Geopolitical risks and other shocks affecting tax policy: Wars and other geopolitical tensions continue to disrupt global commerce and sea-cargo transport, such as in the Red Sea and Suez Canal. Climate-related issues, currently limiting the flow of container ships in the Panama Canal, also affect supply chains, along with other macro-risks. These challenges will linger, if not intensify, in the next 12 months. It appears likely to produce regional economic imbalances, and perhaps, wider shocks capable of producing budget imbalances and tax adjustments at home.
• Federal revenue-sharing declines: Federal revenue-sharing with the states is quickly slowing, as pandemic-related federal relief funds wind down. Upcoming national elections will influence fiscal policymaking during upcoming state legislative sessions.
• The real value of sales tax revenue in today’s economy: While sales tax revenues increased in nominal terms (the dollar amount) in the past two years, they decreased in real terms (actual value) due primarily to the impacts of inflation (i.e., the higher costs of goods, labor and other services). Imagine getting a 3% salary raise during a year in which inflation raised your spending costs by 6% – that’s the type of dynamic states currently confront.

These factors (among others) increase the likelihood that some, or even many, states will be less likely to enact substantial reductions to property and income taxes this year. I also expect many states, including those wrestling with budget deficits (e.g., New York), to pursue new revenue-raising measures, such as:   

• Advertising and digital services taxes: Many states have new digital services/advertising proposals in place, including ongoing court battles over Maryland’s Digital Advertising Gross Revenues Tax. Keep an eye on the digital taxation policy models the Council On State Taxation (COST) and Multistate Tax Commission (MTC) are developing. These models could help bring greater standardization to how states tax digital products, services and data.
• E-commerce taxation changes: State remote seller and marketplace facilitator (MPF) regulations will continue to amend the receipts-based nexus standards and MPF collection requirements in 2024. The rules continue to change as states reevaluate their economic threshold changes in parity with market shifts and increased e-commerce volume. These changes include new tax- types under specific collection regimes and provides further guidance on how these taxes apply to different industries and business models.
• Excise taxes: State policymakers will continue to focus on excise taxes, such as those designed to collect tax revenue from online gambling transactions. 

While that’s a lot to chew on, there’s plenty more. Tax exemptions also remain a hot-button issue at the state level. And sales tax rate increases and rate changes, which reached a record level in 2023, remain a focal point among state and local jurisdictions. Throughout 2024, I will be sure to keep readers updated on tax policy changes that may impact indirect tax teams and leaders.