Indirect Tax Trends Part 1: Sales Tax Changes, Base Expansion, and New Fees

During the first six months of 2026, the combined average U.S. sales tax rate increased for the first time in four years, according to the Vertex 2026 Mid-Year Rates and Rules Report. This shift – which reflects average sales tax rate increases at the state, county, city and district levels – raises a deeper question: What’s driving state and local tax jurisdictions to change rates and introduce new sales and use taxes at a blistering pace?

The answer involves a broad, complex, and decidedly interrelated mix of domestic tax-compliance factors, three of which I’ll dig into here:

• Federal fiscal retrenchment shifts costs downward to state and local jurisdictions. State and local governments are contending with a fiscal triple whammy, and then some. First, the hundreds of billions of dollars states and localities received as part of the pandemic response are receding. Second, the One Big Beautiful Bill Act (OBBBA) reduces federal revenues and scales back federal support for programs and agencies such as Medicaid, the Supplemental Nutrition Assistance Program (SNAP), and the Federal Emergency Management Agency (FEMA). These reductions shift significant fiscal and operational burdens to state and local governments, which depend heavily on federal transfers to administer and fund these programs. Third, while aggregate state rainy day funds hit record levels at the close of fiscal 2025, forward-looking measures are showing signs of decline. The median rainy-day fund as a share of general fund spending dropped last year for the first time since the Great Recession, with further declines projected for this year and 2027, according to the National Association of State Budget Officers (NASBO). Growing political pressure to reduce income and property taxes is adding strain, leaving many states with fewer mechanisms – including rate increases, sales tax base expansion, excise tax increases, new fees, and reductions to services – to close budget gaps.
• Professional services and digital offerings are prime targets of base expansion. Last year, Texas expanded the range of data processing services subject to sales tax, while Washington broadened the reach of its retail sales tax to cover many business, personal, and professional services. This spring, the Minnesota Legislature considered extending its sales tax to accounting, legal, management consulting and similar professional services, but the effort failed after pushback from professional services firms and business groups.  Meanwhile, lawmakers in Nebraska have explored eliminating sales tax exemptions on business services, and Maryland legislators have floated broader service tax expansions to fund long-term education initiatives. This trend is likely to intensify, as budget pressures grow and consumer spending continues shifting from goods toward services and experiences, many of which remain exempt from sales tax.
• New fees, adjustments to existing fees, and challenges to fees are proliferating. In recent years, Colorado and Minnesota’s retail delivery fees have already seen repeal efforts and revisions, forcing tax groups to repeatedly update their compliance processes. State and local lawmakers in Washington, New York, Nebraska, Hawaii, Mississippi, and other states have either drafted proposals for delivery fees or conducted feasibility studies. Environmental fees, airport surcharges, ground transportation fees, entertainment district fees, and other narrowly focused or localised fees continue to proliferate. While these fees behave like indirect taxes, they are not administered uniformly, which introduces ambiguity and operational friction to the compliance lifecycle.

Combined, these dynamics place upward pressure on indirect tax rates. Federal retrenchment pushes fiscal burdens down to states and localities that have fewer levers than ever to close budget gaps. At the same time, jurisdictions are widening their tax bases to reach professional services and digital offerings. And a growing patchwork of fees is layering even more complexity onto an already demanding compliance landscape.