Sub-state jurisdictions are increasing sales tax rates at an impressive clip, even as the implementation of new sales taxes at the district level (possibly) regress to their pre-COVID mean. As a result, indirect tax teams across all industries need to remain on their toes.
Sales tax changes will remain high due to increased funding needs of state and local governments and the likelihood of less federal stimulus. Funding is a challenge for state and local governments due to wage inflation and retention of government employees, a growing inability to issue more debt, and an overall need for social services. In addition, the sales tax base has been narrowing for many years, so rates will continue to rise. The application of sales tax to more types of services and the adoption of new digital sales taxes are likely to continue after analyzing the initial cut of Vertex’s Mid-Year 2022 Sales Tax Rates and Rules Report.
The numbers – of sales tax increases and decreases, new rates, and changes to the average combined sales tax rate – are crucial, of course. However, it’s just as important for indirect tax leaders to understand the broader economic, business, and policy factors that ultimately cause these numbers to move -- and they’ve been moving a lot. Here are three of the most noteworthy sales tax rates and rules trends from our research on changes that occurred from Jan. 1 through June 30:
- City and county sales tax rate increases far outnumber decreases: At the city level, sales tax increases (126) outnumbered decreases (20) by more than a six-to-one ratio. Counties enacted nearly twice as many sales tax increases compared to decreases (15).
- The combined average rate reaches a new high: After holding steady for a brief COVID-induced lull from 2020 to 2021, the average U.S. sales tax rate (which combines the average state, county, city, and district rates) resumed its upward trajectory this year, hitting 10.17%.
- The implementation of new district sales taxes may be leveling off: New sales taxes were imposed by districts at a near-record pace during each of the first two years of the pandemic. Through the first six months of 2021, districts enacted 127 new sales taxes; through the first six months of this year, districts implemented only 54 new sales taxes. This two-year flurry of activity appears to be leveling off.
The decrease in new district taxes should not lull indirect tax teams into a false sense of “back to normalcy.” For the Vertex Mid-Year Sales Tax Rates and Rules Report for 2022, click here.
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