Sales tax compliance is a demanding job for finance teams like yours.
For example, comparing the number of tax rate changes across the U.S. for January 1-June 30, 2023 vs. January 1-June 30, 2022, the volume of changes increased 43%, according to the 2023 annual Mid-Year Sales Tax Rates and Rules Report from tax technology solutions provider Vertex.
In the first half of this year, there were 431 new sales taxes and tax rate changes at the county, city and district levels (302 at mid-year 2022), the report said.
Where the sales tax changes are coming from
A big driver of that is 148 sales tax rate changes at the district level. Your team had just 37 district-level rate changes to adjust to in January through June of 2022, according to Vertex. What’s even more interesting is most of the changes (141) were rate decreases, which is welcome news. In fact, the district-level average tax rate is .9500%, the lowest it’s been since 2014.
Another positive is there were 95 city tax rate changes, compared to 146 in the same window the year before. However, most taxing cities raised their rates. The increases outnumbered the decreases 82-13.
At the county level, there were 46 rate changes at the midpoint of this year (42 at the same time last year) – 33 of them increases and 13 decreases.
There’s also been a surge in new taxing cities and districts year over year:
- 37 new cities in the first two quarters of 2023, compared to 22 in the first half of last year, and
- 101 new taxing districts, compared to 54 in 2022.
Finance departments have also had to keep track of four new taxing counties (there was just one during the first two quarters of 2022).
That’s a lot more obligations for assessing, collecting and remitting sales tax, so agility in Finance will be crucial for businesses to keep compliant. Do your staffers know that, according to Vertex, there are now:
- 46 taxing states
- 1,962 taxing counties
- 2,895 taxing districts, and
- 6,962 taxing cities?
Takeaways from the trends
Local governments continue to rely more on sales tax revenue to fund their ongoing operations. Not only are sales taxes easier to administer and collect than income and property taxes, over the past 60 years, in times of adverse economic cycles, sales taxes have proved to be a resilient method of funding, Vertex said.
Here’s what to keep in mind going forward:
- Exemptions are narrowing tax bases. State sales taxes have remained unchanged (the average rate is 5.6255%), but for how long? Even with the pressure on sales and use taxes to be a driver of revenue for state and local tax jurisdictions, state legislatures continue to introduce an assortment of temporary and permanent sales tax exemptions. Normally, exemptions are a good thing for business. But according to the Tax Foundation, tax holidays don’t just complicate sales and use tax compliance for businesses, they generally don’t increase economic activity because they target items consumers will buy anyway.
- Budget for a “fee-for-all.” In addition to sales tax, various fees have become a popular revenue generator for state and local jurisdictions. Environmental “green” fees have grown substantially over the past several years and that trend continues. This year, California, Colorado, Maine, Maryland and Oregon have enacted legislation that attaches new environmental fees to plastic, paper, glass and metallic packaging materials. Other new fees popping up include airport and retail delivery fees.
- New district taxes are all about funding. Newly enacted taxes at the district level, such as for fire & rescue or parks, have come online because of rising costs of goods and services due to inflation. Taking on additional debt is more challenging because of high interest rates.
In addition to A/P and A/R making payment and collection adjustments to accommodate sales tax rate hikes in the taxing jurisdictions you do business in, the high volumes of rate changes and new sales taxes may require you to:
- expand your finance team
- train staffers to handle tax management
- outsource tax management to an external firm, or
- automate tax management.