I want to follow up my initial highlights of Vertex’s 2023 Mid-Year Sales Tax Rates and Rules Report with some news about the current indirect tax climate: The total number of sales tax rate changes and new sales taxes that were enacted from January 1 through June 30 of this year increased 43% over the same period in 2022.
During the first half of 2022, there were a total of 302 new sales taxes and tax rate changes at the state, county, city and district levels; this year, that total (again – rate changes plus new taxes) increased to 431.
Surges in new taxing cities (37 so far in 2023 vs. 22 during the first half of 2022) and new taxing districts (101 so far this year vs. 54 in the first half of 2022) are driving this surge. We’ve also experienced a large increase in district-level sales tax rate changes (148 so far this year vs. 37 in the first half of 2022). Fortunately, most of those district-level rate changes have been decreases; that said, the volume of those changes certainly complicates tax compliance activities.
The big question is what’s driving all of these changes? I see two dynamics having substantial impacts on sales tax rates and rules changes (along with a related trend that’s also driving compliance complexity):
- Taxing districts require more funding: District taxes fund essential services, such as parks, police forces, fire departments, search and rescue squads, and some utilities. Through the first half of this year, 101 new district taxes have come online. The explosion in new district taxes is, first and foremost, about funding. Taxing districts consume goods and services just like individuals and businesses do. Just like us, districts have seen the cost of goods and services compound due to inflation. Plus, many public entities have cut back on services and trimmed their budgets to the point where further reductions would be problematic. Issuing additional debt is also difficult now that interest rates are much higher and likely to stay there for some time. All of this means that we can expect new taxing districts to emerge.
- Exemptions are also adding up: State legislatures continue to introduce an assortment of temporary (e.g., “tax holidays”) and permanent sales tax exemptions. Combined with a related desire to limit income tax and property tax rate increases, the growing use of exemptions is accelerating the narrowing of the state tax base. This places greater pressure on sales and use tax as a driver of revenue for state and local tax jurisdictions. Sales tax exemptions pose a range of challenges to indirect tax groups and other stakeholders. According to the Tax Foundation, tax holidays generally don’t increase economic activity because they are targeted toward items consumers will necessarily purchase. Because most holidays are temporary, they only complicate sales and use tax compliance for businesses.
- A “fee-for-all” trend also requires attention: In addition to tracking high volumes of sales and use tax rate changes, indirect tax groups also should keep tabs on the introduction of new fees. You’ve likely experienced this trend on a more personal level after adding up the new fees appearing on your heftier restaurant checks and hotel bills in popular entertainment districts within a growing number of cities. Environmental fees have been coming in high volumes for several years, and that trend continues: so far this year, states including Maryland, Maine, Oregon, Colorado and California enacted legislation that attaches new environmental fees to plastic, paper, glass, and metallic packaging materials. The good news is that Vertex solutions currently support upwards of 1,000 different fees, the majority of which are green fees. Of course, state and local jurisdictions continue to come up with new fees. We’re seeing more airport and retail delivery fees – and additional fees mean additional complexity for tax groups that are already grappling with high volumes of rate changes and new sales taxes.
There you have it: three sales tax rates and rules trends to monitor this year. Stay tuned - we'll talk more about these, other challenges and hot topics throughout the year.
Please remember that 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.