Through the first five months of 2020, sales tax rates at the city level are on pace to notch their highest number of changes in more than a decade: 150 city sales tax rate changes have occurred to date with 68% of them occurring in the second quarter.
Sales Tax Rate Expectations for 2020
Is this COVID-19 related? Maybe. Of the 150 rate changes, 140 were increases, while 10 were decreases. In addition to these changes, 35 new city taxes and 88 new district taxes have also been enacted this year. In the second half of 2020 we expect to continue to see significant changes to state, county, city and district sales tax rates and rules. These new taxes will cause more disruption to tax functions striving to keep pace with COVID related impacts to their businesses, customers and employees, as well as with pre-existing tax challenges.
It is all but certain that all types of taxes will play a major role in the post-COVID-19 economy. Sales tax represents the second-largest source of state and local revenue behind property taxes, according to the Tax Foundation. Future adjustments could take the form of a tax decrease to stimulate economic activity. Alternatively, jurisdictions could increase sales tax as a “pay for” to generate revenue given the historic decline in state and local tax revenues and to offset debt and cover the high costs of COVID response activities.
The Magnitude of Sales Tax Changes & How Vertex Stays Ahead
We are anticipating a wave — or even successive waves — of sales tax changes. Yet, the precise nature and magnitude of these changes remain uncertain for the time being. Many state legislatures on recess at the height of the pandemic postponed or suspended their sessions and some have yet to reconvene. When they do, it’s a safe bet that we will see an increase in the number of state sales tax rate changes enacted in 2020; none occurred in the first half of the year. Consumption tax, including sales taxes, historically represented a stable revenue even in economic downturns. However, that is not the case in the current COVID-19 environment, where consumption has declined.
Given these uncertainties and the tax management challenges they prompt, Vertex has continued to incorporate into our offerings all new sales tax rate changes as they occur, as well as country VAT rate changes. We’re also monitoring potential rate changes at a higher frequency and intensity than normal to help customers respond as proactively as possible.
On that note, early analysis of our annual Mid-Year 2020 Tax Rate Report indicates that the number of city rate changes (150) and the number of new taxing cities (35) are significantly higher compared to the same period in 2019. Since 140 of the 150 rate changes were increases, we can only surmise that these cities needed to fill a revenue gap already identified. We see county taxes following a similar pattern. Of the 36 county tax changes in the first half of this year, 89% were increases in rates. This trend may indicate that taxes are already being used to fill revenue gaps.
Post-Pandemic Tax Outlook
Other figures through the first half of 2020 should be evaluated in the context of the pandemic. Again, state sales tax rate changes are likely to increase after more state legislatures begin to reconvene. Prior to the pandemic, many state legislatures were poised to follow 41 other states by enacting new post-Wayfair marketplace facilitator laws. In addition, district rate changes and new district taxes stand a stronger chance to increase by the end of 2020 as more initiatives designed to address COVID-19 related tax gaps appear on November ballots.
While it’s not guaranteed that the current pace of rate changes will sustain during the second half of the year, if it does, the number of sales tax rate changes in 2020 would reflect the second highest (to 2017’s 725 rate changes) total in the past 11 years. This potential unprecedented activity requires tax leaders and professionals to stay abreast of certain considerations that I will share in my next post.
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.