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Ranking the Best (and Worst) of State Sales Tax Systems

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Which states’ sales tax systems make the grade, and which fail to do so? 

The Council On State Taxation (COST) answered those questions back in 2018 when it published its initial Sales Tax Scorecard. A few months ago, COST issued another comprehensive Scorecard report that features new and more expansive evaluation criteria, including assessments of digital taxation, marketplace facilitator laws, business input exemptions for retailers, and more. The four top-rated states, all of which earned B+ letter grades, include Indiana, Michigan, Ohio, and Wisconsin. The states with the lowest grade for their sales tax systems include Alabama, Colorado, Louisiana, Mississippi, and South Carolina – all of which received F grades from COST.

Their membership consists of more than 500 companies that engage in interstate and international business. Most members are either sellers that collect sales tax on behalf of the states and/or purchasers that accrue sales tax due. 

The Scorecard’s purpose is to offer a nationwide perspective to state tax policymakers regarding the most, and least, effective state sales tax administrative practices. To that end, the current Scorecard evaluates multiple criteria in seven primary subject areas:

 

  1. Exemptions for business inputs;
  2. Taxation of software and digital products;
  3. Sales tax simplification and uniformity;
  4. Centralized sales tax administration; 
  5. Fair sales tax processes;
  6. Reasonable tax payment/credit administration; and
  7. Fair audit and refund procedures. 

For example, the business inputs exemption category focuses on the pyramiding of taxes that occurs when a state taxes both business inputs and household purchases. The category includes analyses of state sales tax exemptions for business purchases of manufacturing equipment and inputs; equipment for telecommunications, cable and electric/gas service industries; and retail industry inputs. COST’s comprehensive 87-page report on the Scorecard details grading criteria and decisions in each category. The report contains detailed snapshots of each state’s overall grade as well as their marks in each of the seven categories. 

What do top-rated states do differently from a sales tax perspective? For starters, Indiana, Michigan, Ohio and Wisconsin impose less extensive taxation of business inputs. These states also score comparatively high on fair audit and refund procedures. Not coincidentally, all four states are full members of the Streamlined Sales and Use Tax Agreement (SSUTA). On the other hand, none of the five lowest-rated states are members of SSUTA. Alabama, Colorado, Louisiana, Mississippi, and South Carolina also received less-than-average scores on the exemption of business inputs while performing poorly across most of the seven categories. One exception, Mississippi earned a better-than-average grade on central sales tax administration.

While each state’s letter grades in the various categories may pique your interest, the report’s excellent analysis will shed even more valuable light on leading and lagging administrative practices. This is a great read for any tax leader who maintains relationships with state department of revenue administrators.  

Disclaimer

Please remember that the Vertex blog provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in the Vertex blog are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.

Blog Author

Michael J. Bernard, Chief Tax Officer – Transaction Tax at Vertex Inc. Vertex's Chief Tax Office (CTO) provides insight regarding the impact of tax regulations, policy, enforcement, and emerging technology trends on global tax department operations.

Michael J. Bernard

Vice President of Tax Content and Chief Tax Officer

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Michael Bernard is the Chief Tax Officer of Transaction Tax. In his role, he provides insight and thought leadership around tax department operations, U.S. indirect tax, tax risk management, and tax policy, as well as emerging tax trends. He is an executive-level tax attorney with a diverse portfolio of experience in corporate tax, administration, and finance, including a substantive knowledge of U.S. and international tax laws.

Prior to joining Vertex, Michael was in various tax leadership roles at Microsoft Corporation for 28 years, the most recent being Senior Director – Tax Counsel. Michael led teams in the following functional areas: direct and indirect tax controversy, sales and use, business license, property, tax IT, SOX, and telecommunications. He also co-led a corporate taxpayer advocacy group with the Washington Department of Revenue and was a Director on the Board of the Washington Research Council. Michael has also testified before administrative and lawmakers at both the federal and state level.

Michael earned both a J.D. and a Bachelor of Science in Business Administration from Creighton University. He is a part-time lecturer of Law in the LLM program at the University of Washington School of Law. Michael also served on the board of directors, executive committee, and chaired committees for The Tax Executives Institute (TEI) for nearly 25 years.