Must-See Viewing: Sales Tax Rates and Rules Changes Poised for Record Year

U.S. Capitol at sunset

As the NBA Finals pass their mid-point, it’s worth keeping in mind that the second half of championship basketball games offer the most compelling viewing experiences. The same seems likely to hold true for U.S. sales tax rates and rules changes during the second half of 2021. 

As we reported in our preview last month, new district sales taxes have been rising at a rapid clip this year. That trend continued during the past 30 days. Districts are also changing their rates more frequently. And we’re also seeing elevated levels of sales tax rate changes at the city level.  

These shifts bear monitoring by indirect tax teams; so too, do the underlying factors driving sales tax rules and rate changes. As tax groups strive to tame increasing rules and rates complexity, they should keep the following in mind:

  • District-level sales tax changes poised for a record year: Through June 30 of this year, 127 new district taxes have been enacted. During the same January-June time period in 2020, 88 new district taxes materialized. If the current pace continues for the rest of the year, 2021 would see the enactment of a record number of new district taxes, exceeding the 237 new district taxes that appeared in 2017. The frequency of changes to existing district-level sales tax rates is also rising. From Jan. 1 through June 30 of this year, there were 31 district rate changes – a figure that approaches the number of total annual district rate changes that occurred in 2019 (38) and 2020 (36). 
  • City rate changes are not far behind: If the current pace of city-level sales tax rate changes (137 through June 30) sustains for the rest of the year, 2021 would surpass a record set in 2017 (when there were 254 city rate changes).
  • Watch local jurisdictions closely until the 2021 buzzer sounds: While the frequency of city and district sales tax changes could slow in the coming months, it is important to note that local jurisdictions often make rules and rates changes in response to federal and state-level actions. As state governments conclude their legislative sessions, city, county and district decision-makers will consider if, and how, to adjust their tax policymaking in response to state-level changes as well as to any shifts in federal funding.
  • The post-COVID tax policy realignment is underway, and it could bring major changes: Tax authorities have one of two levers to pull to generate more revenue in response to budget shortfalls and other funding needs. They can raise tax rates or expand the tax base; taking both actions risks sparking major backlashes among taxpayers. At this point, the very beginning of the still-uneven post-COVID era, it appears that more tax jurisdictions are leaning toward base expansion. That makes sense in a post-Wayfair environment and given the degree to which tax revenues from e-commerce activity have surged during the pandemic and proved crucial to so many state and city budgets. As more state and local governments apply greater scrutiny to budget gaps and growth plans, they are likely to seek out innovative ways to widen the tax base. Various forms of digital taxation (think of extending sales taxes to streaming video and music services, for example) are likely to feature prominently in tax policy brainstorming sessions in the near future.

Revenue-sharing among various levels of governments (e.g., between federal and state, or between state and cities) also warrants monitoring. Revenue-sharing in 2021 is markedly different from revenue-sharing a few decades ago. Writing in Route 50, University of Georgia Associate Professor Eric Zeemering, notes that “Local governments across the United States are leading the public response to the Covid-19 pandemic … Yet, providing this assistance and responding to the pandemic is taking an economic toll on local governments and putting them in a precarious financial position.” Zeemering suggests that a mechanism like the 1970s-era General Revenue Sharing program could help localities address the pandemic’s economic fallout. However, many cities and local jurisdictions are not counting on that type of cooperation, according to a National League of Cities survey conducted prior to the most recent federal stimulus package. The survey found that cities experienced, on average, revenue declines of  21% since the beginning of the pandemic, while their expenditures – including PPE, remote work technology and overtime pay for essential employees – increased 17%. The survey also found that an estimated 6,000 cities, towns and villages, did not receive any aid or funding from the CARES Act Coronavirus Relief Fund.

Declines in revenue sharing help explain why the average sales tax rates at all levels – and the combined average rate that consumers pay – continues to climb each year. In 1990, a consumer may have paid a 5% sales tax on a purchase – the vast majority of which reflected the state sales tax rate. Today’s consumers pay an average state sales tax rate of 5.63% — along with an average county rate of 1.75%, an average city rate of 1.76% and an average district rate of 1% for a combined average sales tax rate of 10.14%.

While we offer no precise predictions of how the 2021 sales tax rules and rates changes will play out, it seems like a slam dunk that the combined average rate will reach new heights.

Click here to view Vertex’s 2021 Mid-year Sales Tax Rules and Rates Report.

Please remember that the Tax Matters 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 Tax Matters 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.

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