2025 indirect tax compliance trends

This time last year, the world was anticipating the biggest global elections year in recorded history. More than 75 countries, containing about half the world’s population, held elections in 2024. Now comes the interesting part for business and tax leaders. In 2025, the impacts of the world’s massive political transitions will come home to roost from a policymaking perspective.

Indirect tax rules and rates will likely undergo substantial changes in the U.S. and globally in the coming 12 months. Not that 2024 was a walk in the park for corporate indirect tax groups. Globally, a growing number of countries increased their VAT rates. In the U.S., city tax rate changes soared and the number of new district taxes coming online approached a decade-long high.

While I take a closer look at figures from Vertex’s End-of-Year Sales Tax Rates and Rules Report in this post, I want to share trends that we expect to influence U.S. and global indirect tax rates and rules in 2025 here. These issues include:

• Mounting fiscal pressures on local governments: Property taxes and sales taxes comprise the largest revenue sources for local governments, and the former is decreasing in many areas. A rise in property tax exemptions and reductions, along with declining commercial property values, are behind the initiative which is driving governments to increase the revenue they derive from sales taxes. Plus, many cities have reduced their services costs as much as possible, so budget cuts may not be a viable alternative.
• Clouds gathering over states’ rainy-day funds: Despite record high level rainy-day funds (more on that in a moment), states are contending with fiscal uncertainty. “Tax receipts in most states declined for the second consecutive year in fiscal 2024 – an extraordinary event outside a recession,” according to a late-2024 update from Pew Research Center. The good news is that states have rebuilt these emergency reserves following pandemic-related withdrawals. Separate Pew research shows that “by the end of fiscal 2024, rainy day fund increases had pushed balances to all-time highs in 38 states.” But the same research points to less optimistic trends. First, the pace of reserve growth is declining. Second, many states are quickly depleting their funds (in many cases, by spending “ending balances,” the portion of left-over budgets). Third, some states, particularly New Jersey and Illinois, currently have very low reserves while others -- including California, Nebraska and Texas –recently experienced substantial drops in their emergency funds.
• Global VAT rate hikes and e-invoicing mandates: Stubbornly high inflation, spending surges related to pandemic-related assistance and particularly social services and geopolitical volatility have driven a growing number of countries to increase their VAT rates. On Jan. 1, Slovakia raised its standard VAT rate from 20% to 23% to help reduce the country’s deficit. Israel also increased its standard VAT rate (by 1%) on Jan. 1. Additionally, Estonia will enact a VAT rate increase, from 22% to 24%, in July bolster the country’s security in response to the Russian invasion of Ukraine. E-invoicing mandates continue to move forward throughout the EU and other parts of the world, placing additional tax compliance burdens on companies that sell (and purchase) in those countries.
• U.S. sales and use tax auditing activity increases – and evolves: While sales and use tax audit frequency is back to pre-pandemic levels, the nature of audits and taxpayer-auditor relationships are changing. While most state departments of revenue (DORs) continue to perform on-site audits of large enterprises, smaller to mid-sized companies are experiencing more remote audits and/or a combination of remote and desk audits. Plus, ongoing staffing challenges are slowing DOR response time to taxpayer requests for rulings on complex compliance issues. Auditors continue to be selective in their scope particularly focusing on major product lines which taxpayers are selling through.

At least three other trends also bear mentioning and monitoring. As auditors and auditing scrutiny become more technologically sophisticated and targeted, a more cooperative auditor-taxpayer relationship emerges. This shift emphasizes governance over transaction-based auditing. Second, the ongoing adoption of fees (e.g., environmental and retail delivery fees), is creating a pressing need for standardizing how fees are published and collected. Finally, the ripple effects of last year’s elections loom large and may have major impacts on corporate tax rates and other factors that affect indirect tax policymaking.

Click here to see Vertex’s 2024 2024 End-of-Year Sales Tax Rates and Rules Report.