Three Sales Tax Challenges That Require Attention

Systax DFE and Vertex Inc.

Mention the sales tax challenges to enterprise tax leaders, and what you’ll hear about, probably at great length, will be the mind-bending complexity across numerous jurisdictions and the never-ending changes in rules and rates. Mention the same thing to state policymakers, though, and you’ll likely get a very different response. While the tax complexity of multi-state commerce may not be top-of-mind, lawmakers do face other structural issues around sales tax. A Tax Foundation report covers some of them.

To be sure, the report finds plenty to like in consumption taxes. They are more efficient than many competing forms of taxation, including income tax, with less impact on savings and investments. Sales taxes scale well with ability to pay, and are more discretionary than other kinds of tax. (See my previous post about this Tax Foundation report.)

The challenges are very real, but they are fixable:

  • The tax base is narrow, and it’s shrinking all the time. As consumption shifts toward services and lawmakers carve out exemptions, the sales tax base is eroding. The answer, according to the report, is to ensure that sales taxes apply to all final consumption: “It is not the role of the tax code to favor piano lessons over baseball bats or e-books over hardcovers. It makes little sense to tax the purchase of a lawn mower but not tax the purchase of lawn care services that obviate the need to own a mower.”
  • Sales taxes can be regressive. Lower-income taxpayers tend to consume a greater share of their income, and their spending often goes to items that are more likely to fall within the scope of sales taxes. Here again, broadening sales taxes to include services can help, since higher-income taxpayers tend to spend a greater share of their income on services.
  • Tax pyramiding is rife. The sales tax applies, in varying degrees, to business-to-business transactions in every state that operates such a tax. As a result, it’s often embedded in the final price of a product or service several times over. A well-structured sales tax would be one that exempts “all purchases made by businesses that will be used as inputs in the production process.” And if that sounds like a VAT … well, yes, it’s a VAT.

Whether or not you agree with the Tax Foundation’s analysis, it contains thought provoking ideas. For an update on the never-ending rates and rules changes, as well as related trends and statistics, listen to our 2022 Mid-Year Rates and Rules podcast.

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

See All Resources by Michael

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.

2022 Mid-Year Sales Tax Rates and Rules Report

In our 2022 Midyear Sales Tax Rates and Rules Report, we detail the standard sales tax rate changes, as well as notable trends and statistics.

pay attention to these audit triggers for a sales & use tax audit