Vertex Mid-Year Report Highlights Rising Volatility in Sales Tax Rates
Report Reveals Average U.S. Sales Tax Rate Reaches All-Time High
Vertex, Inc. (NASDAQ:VERX) (“Vertex” or the “Company”), a global provider of tax technology solutions, announced its Mid-Year Rates and Rules Report revealed that although the implementation of district taxes is beginning to level off, state and local rates are at an all-time high. Corporate tax departments across all industries will be challenged once again and should be prepared to respond to more rules and rate changes, possibly extending sales taxes to services and introducing more digital sales taxes.
Tax professionals should note the following:
- City and county sales tax rates soar: City tax rate increases (126) far outnumber decreases (20) by more than a six-to-one ratio, while counties enacted almost twice as many sales tax increases compared to decreases (15).
- Average U.S. sales tax reaches all-time high: Following 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%.
- Implementation of new district sales taxes begins to level off: Following the first two years of the pandemic, when districts imposed new sales taxes at a record-setting pace, the pace of new rates seem to be leveling off in 2022. During the first six months of this year, districts only implemented 54 new sales taxes compared to 127 new sales taxes enacted within the same time frame in 2021.
With interest rates on the rise, debt-servicing costs will escalate. Rising prices and wages mean it costs more to operate public sector organizations. Governments can either cut expenses or raise revenue to address these challenges. Unfortunately, most governments do not have the capacity to reduce services further. However, sales tax revenues will decline if consumers reduce spending in response to rising prices or a recession.
Historically, over the past 60 years, it has been shown that during adverse economic cycles, the sales tax provides a much more consistent method of funding relative to the income tax. Because of this, several states are considering reducing, eliminating, or replacing the income tax with a broad sales tax. Should these legislative attempts succeed, sales taxes would become an even more significant source of revenue for these states.
It is evident that the U.S. economy is driven by consumer spending. Consumers spend the most on housing, healthcare, food, and energy each year. Given the non-discretionary nature of these items, state and local governments will be challenged in the future as a policy matter regarding how the sales tax base will be expanded.
Vertex is a leading global provider of indirect tax software and solutions. The company’s mission is to deliver the most trusted tax technology enabling global businesses to transact, comply and grow with confidence. Vertex provides solutions that can be tailored to specific industries for major lines of indirect tax, including sales and consumer use, value added and payroll. Headquartered in North America, and with offices in South America and Europe, Vertex employs over 1,300 professionals and serves companies across the globe.