Four sales tax trends for 2024

As I’ve reported, 2023 was a banner year for U.S. sales and use tax rates changes – our final tally shows that a total of 444 sales tax rate changes took place across all state and local jurisdictions. That’s the highest volume of annual rate changes in the past 10 years. The total number of rate changes and new sales taxes across all jurisdictions (676 in 2023), is second only to the 724 changes and new sales taxes that occurred in 2017. For additional information, review our recently published 2023 Vertex End-of-Year Sales Tax Rates and Rules report. 

The value of Vertex’s rates and rules research extends beyond the numbers to narratives. By that I mean the underlying dynamics and trends that are driving high volumes of rates and rules changes, and by extension, additional indirect tax compliance complexity and risk. Here are the top four developments we expect to have significant implications on U.S. (and global) indirect tax compliance in 2024: 

• A tale of two jurisdictions: The record number of U.S. sales tax rate changes in 2023 caps a decade-long trend. Since 2014, an average of 372 sales and use tax rate changes have occurred annually. Add an average 230 new sale and uses taxes per year over the same period and that’s a 10-year average of 602 rate changes/new taxes. Look deeper and you’ll notice a rate-change bifurcation. State sales tax rates have held steady or decreased slightly in the past several years, while the number of new district taxes has ranged from 115 to a staggering 237 in the past decade. A majority of recent district rate changes have been decreases — particularly due to the prohibition of 128 municipalities in Alabama from collecting license revenue, taxes or fees in their respective police jurisdictions. The opposite is true at the city and county levels. Last year, rate increases outnumbered rate decreases at the county level by a 2:1 ratio. At the city level, rate increases outnumbered rate decreases by 5:1. 
• Current state fiscal conditions appear unsustainable: As a result of several years of pandemic-related federal relief, state and local budgets are generally in excellent condition. Many states’ rainy-day funds are at or near all-time highs. That’s great news, but a growing collection of signs suggests that fiscal conditions may deteriorate. The shrinking sales tax base and widespread cuts to other funding sources (e.g., income taxes and property taxes), the end of federal pandemic funding and the growing use of sales tax holidays and exemptions figure prominently in this dynamic. Combined, these factors mean that more state and local jurisdictions will need to increase sales tax rates, implement new fees (an ongoing trend) and extend sales taxes to new areas (e.g., digital goods and services).   
• Expansion of sales tax on services seems less likely: We expect to see more taxes on digital goods and services as well as new fees this year, in part, because another mode of expanding the sales tax base – by applying taxes to services -- seems unlikely to occur in the U.S. Although up to half of U.S. gross domestic product is generated by services, states have encountered hurdles when attempting to extend sales taxes to more. New regulations must be drafted, more auditors need to be trained and hired/substantial process overhauls and related behavioral changes must be performed for services taxes to succeed. Those obstacles are significant, which explains why the widespread adoption of new services taxes by state and local jurisdictions is unlikely.  
• Global perspective – get ready for e-invoicing: Beyond the U.S., two indirect tax determination and compliance trends loom large. First, environmental-related taxes and fees are increasing throughout the European Union (EU) and other regions. Second, the adoption of new e-invoicing requirements in the EU and other parts of the world is a game-changer. E-invoicing rules require indirect tax groups to get up to speed on complex requirements (e.g., distinguishing between tax compliant invoicing and e-invoicing) and the major process and technology-related adjustments these compliance mandates necessitate.  

Tax departments will need to adjust to other developments, including legislative and regulatory changes, in 2024. As always, we’ll keep you posted on those trends and their implications on your work.