Rachel Litcofsky: Welcome to Tax Matters, a Vertex podcast! I’m Rachel Litcofsky, Manager, Public Relations.
In this episode, Vertex Vice President and Chief Tax Officer Michael Bernard highlights findings from Vertex’s 2024 Year-End Sales Tax Rates and Rules Report. Mike and business writer Eric Krell talk about U.S. sales and use tax rate changes and related trends.
Sales tax rate changes remain near record highs. At the city and county levels, the vast majority of these changes consist of rate increases.
Mike also discusses global rate changes, an uptick in auditing activity, and the challenges confronting state and local budgets in 2025.
Now, I’ll turn it over to Mike and Eric.
Eric Krell: Several findings jump out at me, especially at the city and county levels. I want to hear your overall take on the report, and then please tell me what’s going on with city rate changes…
Michael Bernard: First of all, good to be with you, Eric, once again. As you know, our report is widely viewed, heard and read by our tax community. This year, a near-record number of cities increased their sales tax rates and a near-record number of districts implemented a sales tax. That’s in line with a trend that we’ve seen the last couple years, particularly given all the struggles with pandemic costs, inflation costs and things like that. So, nothing unusual there, but obviously those numbers continue to increase every year – and they probably will do so in 2025 as well.
Eric Krell: Tell me about the increases, and then also tell me about some of the fiscal issues they’re contending with.
Michael Bernard: Sure, of course. If you think about cities, for the most part they only have two key sources of revenue. One is a property tax, and the other one is a sales and use tax. And the cities have done well in property taxes in terms of residential properties. I think most people on the podcast know that the value of homes has been going up and so property taxes have been going up. The challenge has been in the commercial space where larger buildings have been devalued and a lot of companies have looked to devalue those assets. From that standpoint, property tax revenues have gone down. So, one of the things that cities have had to do to continue to have continued sources of revenue is to increase their sales tax. And that’s what they’ve gone ahead and done.
Eric Krell: What about district-level rates and rules changes, Mike – that’s happening there?
Michael Bernard: This report has a 10-year view, and the number of tax of new taxing districts coming on board with a sales tax remains high. And so when we talk about districts, we’re talking about, say, a park district, a fire and rescue district, a utility district or roads -- something that is very specific and needs specific funding. And maybe that funding isn’t coming from general revenues. So, what we see is that these districts that have authority to implement a sales tax are really going and doing that. And one of the biggest reasons they have to do that is that they have costs to keep pace with. The other thing too, Eric, I would say is a lot of these districts have capital improvements. What’s more, they’ve made a decision that they’re not going to issue more bonds. They think bonds and the interest rates that they have to pay on them are a bit high. Rather than issue bonds, they’ve implemented a sales tax. That’s basically how they’re going to fund not only their maintenance, but their capital improvement projects as well.
Eric Krell: What are you seeing from an auditing perspective? What’s happening inside state revenue departments?
Michael Bernard: As we’ve discussed in prior episodes on this podcast, the [state] Department of Revenues (DOR) are still stressed in terms of finding and retaining talent to actually audit, and particularly in the marketplace areas is where they’ve had some struggles. But what we’ve seen and talked with our customers about is that audit activity is back at where it was before the pandemic -- it has been for about a year now. So, our larger customers, the enterprises with over $1 billion in annual revenue, are seeing onsite auditors come back. But a lot of customers in companies with lower revenues are dealing with desk audits.
A desk audit is normally where the Department of Revenue will send a series of requests. They’ll ask you to pull certain information from, say, a three-year period. You might have to pull four or five months of activity, and then basically they arrive at an error rate and that error rate is projected over a three-year period. And that is essentially what your assessment is. One of the things that I would say is that customers really need to do is make sure that the audit months that are “in period,” are representative of their typical transaction activity. We’ve also seen that auditors are starting to be more selective in the product catalogs or the products that they audit and use to come up with that error rate. The auditors
may not look at the full catalog; they may just look at, say, the top 10 or so products that are sold by a company.
Again, be very mindful that the auditors are actually following their statistical sampling procedures in that area. The last thing I would about in audits is that if you have an environment that is very accurate and you haven’t had large error rates in the past, consider asking the auditors to audit your internal controls around your tech stack – in support of your transaction tax environment. If they look at those controls, you may be able to get a light-touch audit given the fact that you’ve kept your updates current and that you are mapping things properly. We’ve seen more and more customers actually try and do that rather than subject themselves to a kind of a full invoice audit.
Eric Krell: Taking a broader view, what are you seeing from a global perspective?
Michael Bernard: Three big things are happening outside of the US. First and foremost, I something we haven’t seen in the past but we saw it in the middle of 2024 and we expect to see it more this year: more countries are raising their VAT rate. Remember, VAT is an important component of a many countries’ revenue, or funding. And [many countries] continue to deal with high inflation costs. They’re also trying to deal with an enormous surge in social services – either people retiring or people who just need some help because of what happened in the pandemic.
Given those two factors, you’re really starting to see a big uptick in VAT rates. The second thing, which is not as prevalent here in the United States but very prevalent overseas, is that carbon taxes are going to be continued to be applied to carbon sources… While you see bag fees and environmental fees applied here in the U.S., those types of taxes are higher in Europe and will continue to be quite prevalent. And then the last piece is e-invoicing, which is very prevalent outside the U.S., but not inside the U.S. Our point of view is that e-invoicing is not going to be coming to the U.S. anytime soon, but it is prevalent overseas as a way to prevent fraudulent activity in the VAT world and to force business transactions to become more digital… [E-invoicing mandates] give the governments more transparency into sellers and buyers as to their VAT obligations, but also into what they’re buying and selling.
Eric Krell: Mike, what other indicate tax and tax-adjacent trends are you tracking in 2025?
Michael Bernard: There are a number of them. I would start out with fees. Our company, Vertex, supported about 400 fee impositions a couple years ago. And today that figure is up to around 1,200 or 1,300 fees. I think that’s going to continue. When I talk about fees, I’m talking mostly about green fees. I’m talking about also what I call neighbourhood fees… Or, if you buy something on an e-commerce website and it’s shipped to you, there are a number of states that are starting to impose retail delivery fees. The challenge with fees, Eric, is that they’re not centrally published or collected centrally. You don’t see them on a DOR website, and you have to file separate returns to comply with them. So, part of the work that we’re doing is trying get these centrally reported and published … I think that’s one thing that the taxpayer community is really looking forward to accomplishing because it is very difficult to file all these returns and keep track of these fees.
The second thing I would also say is there’s a substantial amount of work that’s going on in the digital streaming area. So a lot of folks may understand that if you purchase something or you stream something over the Internet or that, there is normally sales tax due. In some states there’s no sales tax due and some it’s exempt. There is a body of work going on at the Multistate Tax Commission today where a uniform act – probably put out in the 2026 timeframe -- will have standard definitions for how states uniformly tax streaming…
And then the other thing that’s important to remember for 2025 going forward is that there were three big federal tax acts that were passed during the Biden administration. These gave enormous support to the states, both in the pandemic relief area, so for people who were adversely affected by the pandemic, but then there was a lot of other things that were in there. A green fee bill was passed at the federal level, and then there were also roads and bridges, the money that was dispersed out for that. Some monies at the federal level also went out to help with prescription drug medications. So, a lot of money was actually given to the states over the years. They used that money, whereas before they might have policy issues where they were going to actually going to spend their money, their own funds to do it. So, they didn’t have to. All of those payments stopped as of December 31, 2024. If states want to continue those kind of policy initiatives, they’ve got to fund those things on their own moving forward.
Eric Krell: Thanks very much, Mike. I appreciate the look ahead and the look back, and I look forward to speaking to you again soon.
Michael Bernard: Thank you, Eric. Always good to visit with you as well.
Rachel Litcofsky: Thank you for listening to Tax Matters, a Vertex podcast…Check back here for more episodes soon.
This transcript has been edited for clarity.
