The 2022 End-of-Year Sales Tax Rates and Rules report by tax technology solutions provider Vertex Inc. has both good news and bad news for your finance team.
First, the good news: The overall number of sales tax rate and rule changes impacting businesses is the lowest it’s been in eight years, with 542 changes at the state, county, city and district levels (down from 606 in 2021).
However, that’s mainly because of a decline in new district taxes. After a five-year stretch, during which an average of 180 new district-level taxes were created each year, that number fell to 115 last year (down from 197 in 2021).
According to Vertex, at the district level, tax decreases outnumbered increases 50-13.
Finance departments had to adapt to one new taxing county and 49 new taxing cities (down from 51 in 2021) during 2022.
But while the total number of transaction tax changes across the U.S. declined last year, the bad news is most taxing jurisdictions continued to raise their rates.
Your team faced 235 city sales tax rate changes, according to Vertex. Of those city sales tax changes, 200 were increases and 35 were decreases. At the county level, there were 55 rate increases and 23 decreases.
Bottom line: If this trend continues, there’s a good chance A/P and A/R will need to make payment and collection adjustments to accommodate sales tax rate hikes in the taxing jurisdictions you do business in.
What’s behind it right now
In a statement, Vertex’s vice-president of tax content and Chief Tax Officer Michael Bernard said there are a couple of factors playing a part. “Governments need to fill budget gaps as federal COVID-related funding will begin to run dry, as borrowing becomes more expensive and overall inflationary pressures on labor, services and consumables continue,” he said.
“On top of these economic factors, sales tax is generally more efficient to impose and administer relative to property and income taxes, making it a more resilient revenue source for governments, particularly in times of economic distress.”
What it means going forward
The report also identified these trends that you’ll need to keep in mind:
The feds are paying close attention to all the post-Wayfair sales taxes and may take measures to get it under control. The General Accounting Office recently encouraged Congress to work with states “to establish nationwide parameters for state taxation of remote sales” for several reasons, including the headaches remote sellers experience while trying to comply with “a complex patchwork of requirements … governing the taxation of remote sales.” Also, the U.S. Senate Finance Committee conducted a hearing to examine the impact of the South Dakota v. Wayfair decision on small businesses and remote sellers.
Tax policy has a lot to do with economic and fiscal conditions. Although inflation tends to be headed downward, it remains high and is unlikely to return to pre-2022 levels any time soon. Many economists say there’s going to be a recession this year, even if it’s only a moderate one. As high debt-servicing costs sustain or increase, state and local jurisdictions may feel the need to make some moves to satisfy their revenue needs amid higher prices and labor costs.
Shrinking sales tax bases may lead to more taxation of services and digital goods and services. The sales tax base has shrunk significantly in the past two decades, according to Vertex’s research. State sales tax bases “are narrowing,” according to the Tax Foundation, “forcing states to either raise rates or shift to other sources of tax revenue.” These sources include a growing number of digital taxes and could soon extend to professional services, such as accounting and other B2B offerings.
Sales tax increases are connected to property and income tax revenue declines. State legislature activity and ballot initiatives in 2022 reflected a growing desire to limit income tax rate increases. And as you’re probably aware, commercial office space values are declining due to permanent hybrid work models. This will result in lower property tax receipts in 2023 and beyond. Because property taxes, income taxes, and sales and use taxes represent the top three funding sources for state and local governments, you need to be prepared for the possibility of higher sales tax rates.
By the numbers
Some fun facts for Finance:
- The average state sales tax rate in 2022 was 5.6255% (compared to 5.6281% in 2021).
- The average county tax rate last year was 1.7721% (1.7622% in 2021).
- In 2022 the average city tax rate was 1.7703% (an increase of .0088% over 2021)
- At the district level, the average tax rate was 1.0123% (up .0103% from 2021)
- The average combined sales tax rate was 10.1802% (vs. 10.1237% in 2021)
- Puerto Rico has the highest state sales tax rate at 10.5%. Indiana, Mississippi, Rhode Island and Tennessee are the second-highest at 7%.
- Kodiak and Wrangell, Alaska, and Winter Park, Colorado, have the highest city sales tax rate at 7%. Close behind are Hoonah, Klawock and Selawik, Alaska at 6.5%, and
- Sterlington, Ouachita Parish with the Sterlington Economic Development District No. 1 in Louisiana has the highest combined sales tax rate of 12.95%.