As I’ve discussed, we have already seen a significant number of changes in cities and counties increasing sales tax rates in 2020 and we expect the pace of tax rate changes for state and local taxes to continue or increase throughout the rest of 2020 and into 2021.
Considerations for Indirect Tax Managers
As more sales tax rate changes emerge in the coming weeks and months, indirect tax managers should consider a handful of crucial factors and actions, including:
- The importance of advocacy: The most effective and least complex remedies to address the post-COVID sales tax gap are at the state level. Increases to existing state-level sales taxes tend to produce optimal outcomes for corporate taxpayers (a more manageable compliance burden) and states (the flexibility to allocate money where it is most needed throughout the state). City and local sales tax changes, particularly the introduction of new head taxes or gross receipt taxes, tend to create more compliance headaches and more restrictions when jurisdictions try to allocate that revenue. As state legislatures move closer to reconvening, tax leaders may wish to reach out — directly or through intermediaries — to tax-writing committees to promote the advantages of enacting rate changes at the highest level of the jurisdiction as possible.
- New sales tax rates are preferable to new tax categories: Tax executives also should consider advocating for rate changes over the introduction of new categories of tax when collaborating with state departments of revenue (DOR) and tax-writing committees in state legislatures. While tax gaps certainly will need to be addressed, it is crucial that solutions be as carefully considered and designed as possible. The Organization for Economic Co-operation and Development (OECD) recently promoted this perspective in its guidance on post-COVID tax changes to countries with national value added tax (VAT) or goods and services tax (GST) regimes. That guidance, which characterizes the introduction of new tax types as “undesirable,” due to the increased administrative burden, also applies to state sales tax changes in the U.S. It is administratively easier to deal with rate changes up today and down later than new tax categories.
- Marketplace facilitators’ shrinking margin of (tax) error: Many forms of e-commerce have exploded in the wake of social distancing rules designed to combat the spread of COVID-19. The soaring volume of e-commerce follows a flurry of new post-Wayfair state sales tax rules related to economic nexus and/or marketplace facilitators that have been enacted in the past eight to 12 months. Although federal and, to a lesser degree, state tax audits and enforcement activities have been temporarily curtailed during the initial months of the pandemic, those actions will soon return to normal. Online retailers contending with new tax requirements and soaring transaction volumes should take care to ensure that they can achieve and sustain compliance.
Looking Toward the Future
All companies subject to state, county, district and city sales tax should also keep in mind that audit and enforcement activity is likely to intensify later this year or in 2021 as jurisdictions become even more focused on closing their tax gaps.
If you operate in one of the top three sales tax revenue states - Washington, Louisiana or Nevada, where sales tax accounts for 41% or more of the state’s revenue – get ready for potential increased audit activity! We will continue to keep you updated as the global tax environment continues to increase in complexity. Stay tuned for our annual Mid-Year Sales Tax Rate Report due out in July, as well as a preview of indirect tax changes in Europe, the Middle East and Africa (EMEA).
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.