2023 Legislative Update: More Exemptions, More Fees, One State Tax Cut

Vertex’s tax research team is always on top of emerging legislative updates. Our experts continually monitor tax policymaking at the state and local levels to remain ahead of indirect tax rules and rate changes. This information seeds our sales tax compliance solutions as well as our biannual tax rates and rules reports.  

Part of this research involves keeping tabs on state legislative sessions and evaluating new proposals, and laws, with indirect tax implications. With the exception of special sessions and states whose legislatures remain in session throughout the year, most states have concluded their work at this point.

Here are some noteworthy 2023 legislative trends and developments of interest to indirect tax groups: 

• A notable reduction, a lesser reduction and a stab at simplicity: South Dakota was the only state to reduce its statewide sales tax rate. The reduction, from 4.5% to 4.2%, is temporary. The new rate took effect July 1 (as the Mount Rushmore State’s tourist season kicked into gear), and it will expire after June 30, 2027. Compared to that straightforward bit of tax policymaking, several other states enacted much more involved tax rate changes. Alabama reduced its state sales tax rate on food for home consumption from 4% to 3%. This change takes effect on Sept. 1; and, if growth estimates from revenue resources that feed the state’s Education Trust Fund meet certain thresholds, a further reduction of the same tax rate would take effect a year later, on Sept. 1, 2024. Aiming for simplification, California Public Utility Commission put in place a new line-based surcharge mechanism (based on the number of active lines) that will fund the state’s Universal Service Public Purpose Programs. This new “Public Purpose Program Surcharge,” replaces six previous revenue-generating surcharge programs and applies to wired, wireless (prepaid and postpaid), and Voice Over Internet Protocol (VoIP) providers. 
• More fees: As I recently noted, tax groups have to keep pace with the rapidly expanding implementation of new fees. During their 2023 legislative sessions, Minnesota enacted a new retail delivery fee (one that took effect July 1), and Colorado increased its existing retail delivery fee (from 27 cents to 28 cents – a change that also took effect July 1). On the other hand, the Kansas legislature passed a bill that makes all separately stated delivery charges non-taxable as of July 1. Unfortunately, most states appear more likely to follow in the footsteps of Minnesota and Colorado (including Massachusetts, which is currently considering a new retail delivery fee similar to Minnesota’s rule). 
• Exemptions proliferate: I’ve also covered states’ growing use of sales tax exemptions. This trend continued during 2023 legislative sessions. Florida permanently exempted certain baby and toddler products; clothes, diapers and incontinence products; and oral hygiene products. Tax professionals should keep in mind that many exemptions are temporary. Tennessee enacted a three-month sales tax exemption on grocery taxes (for food, from Aug. 1 through Oct. 31) while eliminating a previous sales tax exemption for direct mail advertising and magazine and books. 

For an additional look at 2023 legislative trends and related sales tax rates and rules changes, tune in to this Vertex Tax Matters podcast.