Introduction
Rachel Litcofsky: Welcome to Tax Matters, a Vertex podcast. I’m Rachel Litcofsky, Communications Manager. In this episode, Vertex Chief Tax Officer Michael Bernard shares his insights on Vertex’s 2024 Mid-Year Sales Tax Rates and Rules Report. Mike and business writer Eric Krell discuss rates and rules changes that affect sales tax compliance.
It’s been a busy year so far.
At the sub-state level, new taxing jurisdictions – and new fees – continue to multiply. City sales tax rate changes have soared, and rate increases far exceed rate decreases in both city and county jurisdictions. Mike weighs in on those changes and more, including global tax compliance trends and value added tax rates.
Now, I’ll turn it over to Mike and Eric.
Eric Krell: Hello, Mike. I hope your summer is off to a great start. Vertex’s 2024 Mid-Year Sales Tax Rates and Rules Report is just about finished, and I’d like to hear your take on it. What findings do you want to dig into first? Michael Bernard: First of all, Eric, it’s always good to visit with you on this topic. It’s one of the topics Vertex’s (our) sales tax community wants to hear about. The first thing that I’d like to point out is that relative to the first six months of 2023 to 2024, the report shows that the number of cities and districts implementing a new sales tax is down a bit; for cities, it’s down about 20%, and for districts it’s down about 25%.
I have two comments on that. One is that there’s been a historic run on cities and districts implementing new sales taxes over the past 10 years. In many cases, many jurisdictions that want to implement a new tax in their locality has already done so – particularly, during the pandemic years. And second, we’re not done with the year yet – right? Obviously, there’s still time for a lot of these cities and districts to implement a new sales tax. They may be taking a little bit of a pause to see how their budgets are going to look. But I would expect our final numbers in 2024 to come in close to what we saw in 2023 and 2022.
Eric Krell: Why are we seeing new sales taxes at sub-state levels as opposed to, say, rate increases by states?Michael Bernard: One thing that’s been very prevalent over the last, say, 10 years is that states have not wanted to increase the sales tax. That’s for a number of reasons. One is that they actually see sales tax as a regressive tax sometimes. Also … at the state level, they’ve granted numerous exemptions in the case of personal care products and things like that. So, they’ve actually provided some relief, not dropping the rate, but clearly providing some relief. The second point, is the continued addition of sales taxes at the sub-state level -- districts, cities, counties…. The type of revenue sharing that used to come from the states no longer exists. These localities need to buy everything from paperclips to fire trucks to asphalt. And they really need these revenues to keep pace with all of the things that they’re dealing with. And it’s just a lot easier, administratively, to implement a sales tax at the local level vs. trying to find some other mode of taxation.
Eric Krell: You got into this a little bit and I’d like you to expand on it, Mike: What’s behind this? In other words, what are some of the economic and/or fiscal factors that are driving the need for more revenue?
Michael Bernard: I think there are three or four reasons, but clearly one [factor] is inflation. Just think of consumers and what we’re paying a couple years ago vs. what we have to pay for today. A lot of goods and services have gone up at a minimum of around 20%. The localities are also consumers and they have to pay for services and employees – and they have to give them good raises to retain them. That’s an area where they’ve had to spend money. Obviously, they also buy a lot of supplies, and those costs have increased. So that’s one thing. And inflation’s just going continue for a while.
Another factor is that most of the localities -- districts, cities and counties -- have cut their services to where they feel they can save money and limit their costs, but they can’t cut them any further. They have a duty to serve the public, whether that relates to roads or social services or other services. They’ve cut those things and saved as much money as they possibly can; and there’s no other place to save money.
The third point is that, say, three or four years ago, they were able to issue bonds at very favorable rates. They could actually extract additional funding from say a bond…. Today, interest rates are much higher, so it’s a lot more expensive for them to issue debt. Instead of issuing debt, a lot of locals have made the decision that they’re just going to raise their sales tax rates and fund not just their ongoing continuing operational budgets, but in some instances actually some of their capital budgets as well. So, all of those things kind of roll together, which is why you’re seeing continued rate increases.
Eric Krell: Fees are an alternative mechanism to raise revenue – are states and locals continuing to reach for the fee lever?
Michael Bernard: They are, and they will continue to do that. Fees are just another form of taxation that are used to extract additional revenue. A lot of that revenue is actually tied to specific policy objectives. So, for example, look at Colorado and Minnesota, which have implemented a fee structure. Illinois as well as New York are now thinking about actually adding fee structures. A lot of those fees are actually being used to pay for road maintenance…. That’s because e-commerce drives the delivery of certain products to households.
A couple of other things… One is that we also see fees quite a bit in the environment area. As it relates to tires or screens that are sold on electronic devices -- disposing those items is actually quite expensive. So, having a fee structure around that pays for those recycling fees and the additional costs that it would take vs. just putting things into a landfill.
You’re also seeing fees that are tied to certain districts. When you go to an airport or you use a shipping terminal, you may have some additional fees on transactions there. A lot of the money generated from those fees is used to support that port authority or that terminal. Because you’re kind of a captive buyer at that point, a lot of times these facilities feel like they can actually add these fees on.
Again, you see those retail delivery fees with some of the major delivery companies, whether it’s for food or products. Again, those fees are being used because they’re obviously driving vehicles across the roads. The last thing I do want to point out is this - about two or three years ago, our company actually supported somewhere in the neighborhood of 400 fees. Today, that number has climbed to about 1,300. Your question at the beginning was, “Is this going to keep going?” And the answer is that it definitely will.
Eric Krell: How do fees affect the end-to-end compliance lifecycle?
Michael Bernard: In a couple of ways. One is a lot of software products have not been built around a fee structure. They’ve been built around a value structure. So, if you sell something for, say, $10 and there’s a 5% sales tax rate on it, you can calculate that easily. But what’s happening is if you have a fee structure that either taxes a number of items or a certain purchase or certain kinds of goods there has to be some engineering work to actually calculate those fees. …The second way is that a lot of retailers have had to restructure their invoicing that they give to you. The reason they have to do that is when those systems were actually put into place, there wasn’t this proliferation of fees. So, they’ve had to rewrite how they invoice and update what’s actually displayed on the invoice to show that. There’s been some substantive work there, and it’s ongoing.
Eric Krell: Are there any actions that could reduce the complexity and burden of fee compliance?
Michael Bernard: Without a doubt… We plan to be active in terms of speaking to governmental and quasi-governmental entities very soon. First and foremost, we think that a fee structure should actually be registered on a state department of revenue (DOR) website. You might have 40, 50 or 100 different fees that are imposed by localities within a state. And there’s really no place where those fee structures and the imposition of those fee structures are actually published. We often get calls from customers who say, ‘Hey, look -- we’ve got a fee here.” And that fee is often at a very, very local level. So, we think first and foremost, fees should be published on a DOR website.
We also think there should be statutes and regulations that are very clear as to what the fee actually applies to. We think what would help compliance, at least for taxpayers, is if those fees could be collected, remitted and reported on one return. Today, you often have to file many, many returns to send in those fees. And then the state would be responsible for distributing those revenues once you file centrally with the state.
The next item [relates to] the fee structures that are being developed by localities, which are sometimes multi-tiered. In other words, you might have to go through two, maybe three different [assessments]: What am I selling? Who am I selling it to? And that approach needs to be eliminated. We need a simple fee structure, maybe based on per-invoice or per-item. It has to be much simpler than what these localities are actually envisioning for how the fee works.
Eric Krell: Before we wrap today, tell me about the global indirect tax issues you’re tracking this year?
Michael Bernard: Sure. I think first and foremost, when we look outside the U.S., it relates to VAT or value added tax. Most nation states have made a decision that they’re not going to increase that VAT rate. They believe that’s probably anti-competitive to do so; it’s also probably regressive on their citizens and customers. So, they don’t want to do that. VAT rate increase also increases inflation, and they’re trying to keep that down. Remember, VAT had a significant impact on funding a lot of pandemic-related costs … and VAT will continue to be an important force and type of funding for nation states.
There’s also a ViDA, which is “VAT in the digital age.” This is a body of work that’s being undertaken by a number of countries in Europe to try and harmonize all of the e-invoicing and continuous transaction control initiatives that are out there. This body of work will continue to evolve over the next several years, but it really is something that’s important.
Also, you’re going to see the proliferation of environmental taxes, particularly in the form of fees in the EU as they relate to carbon and other things like that. So, there are a number of initiatives and developments in the transaction tax world that are very important outside of the U.S. That work will continue and hopefully the harmonization efforts over the next several years will help lessen the burden for taxpayers…
Eric: Thanks very much, Mike. I look forward to continuing our conversation soon.
Michael Bernard: Thank you, Eric. I appreciate it.
Rachel Litcofsky: Thank you for listening to Tax Matters, a Vertex podcast…Check back here for more episodes soon.
Note: This transcript has been edited for clarity.