Indirect tax trends: more U.S. volatility, more EU e-invoicing

The data from Vertex’s 2024 Mid-Year Sales Tax Rates and Rules Report shows that sales and use tax compliance complexity is increasing at the substate level. The data also indicates city-level sales tax rate changes exploded during the first six months of the year. 

The fallout from these changes is another story, one that requires a deeper look at the underlying drivers of sales tax rates and rules changes, as well as several adjacent factors and trends that exacerbate the difficulty of keeping pace with indirect tax policymaking in the U.S. and abroad.

Here are three questions about evolving developments that will have ripple effects on indirect tax groups the rest of this year: 

1. What is going on underneath state sales tax rates in the U.S.? The short answer is “a whole lot.” The country’s 46 state tax jurisdictions are massively eclipsed by 7,008 city tax jurisdictions, 1,964 county tax jurisdictions, and 3,015 district tax jurisdictions. And those sub-state numbers continued to increase in the first half of the year with 30 new taxing cities and 77 new tax districts materializing. Each sub-state jurisdiction has its own sales tax rate – relatively few of which are published in a standard location (though they are contained and continually updated in our software solutions). The proliferation of new sales taxes combined with ever-changing sale tax rates generates a level of granularity that makes sustaining end-to-end tax reporting and remittance challenging. 
2. How can the administration of sales-tax adjacent fees be improved? This is a significant issue that demands a better solution. State and local jurisdictions are adopting environmental, airport, retail service delivery, and other fees at an accelerating pace. Two years ago, Vertex solutions supported roughly 400 fee impositions; today, that number is approximately 1,400. Although fees are not sales and use taxes per se, they pose similar challenges and complexities to indirect tax teams. Unfortunately, there is little, if any, standardization in how these fees are administered, collected and enforced. There are no central state registries for fees, nor are fee reporting and submission processes anywhere close to efficient or centralized. The rules governing fees are frequently multi-layered (and confusing). The amounts of certain retail service delivery fees may vary depending on the purchase amount of the item delivered. The policy reasons behind imposing most fees are often times tied to funding a specific cost of government (helping to pay for road wear-and-tear, footing the bill for recycling, etc.). 
3. How will the EU’s VAT in the Digital Age (ViDA) reform be implemented? As I pointed out in my January report on our rates and rules research, e-invoicing is coming to the EU. In May, the European Commission published an updated draft of its hefty ViDA package, which calls for major rules changes in three areas, including e-invoicing. The proposal would require companies doing business in the EU to comply with new e-invoicing requirements by 2028. So, indirect tax groups should be thinking about how those rules will affect their current invoicing processes and what compliance steps are needed. Keep in mind that these compliance actions are far-reaching - they involve finance and accounting activities; finance and ERP systems; and other systems and processes. Value-added tax (VAT) marks another global tax compliance issue to monitor. Although, we don’t expect these rates to decline any time soon, given that VAT remains one of the most resilient mechanism for funding governments and the public services they provide. As is the case in the U.S., we expect to see more fees adopted in the EU and other parts of the world – many of which relate to environmental impacts, such as carbon emissions. 

One of the most important tax policy questions relates to how long government will sustain a “narrow base, with a high rate” environment in the U.S. while imposing more fees, additional sales tax exemptions, new digital taxes and even more rates and rules changes. Again, for a more detailed look at the sales tax rate changes through June 30 review the Vertex 2024 Mid-Year Sales Tax Rates and Rules Report.