As state and local jurisdictions look for new ways to raise revenue in the wake of pandemic-level spending, sales tax continues to be an attractive way to refill the coffers, while state sales tax bases had dwindled in pre-pandemic times.
Transaction taxes already represent a substantial component of total state and local revenue—an average of 33%. Compared with income and property taxes, the revenue stream from sales and use taxes is far more frequent. Sales tax revenue is more resilient and a steadier stream in economic downturns—and payments are received monthly, far more frequent than property tax payments.
But instead of increasing all transaction taxes across jurisdictions, state and local governments are seeking innovative fiscal methods to create new taxes and further broaden the tax base.
Rethinking Transaction Taxes
Some states are now testing the waters with new and modified hybrid taxes that combine several different indirect tax types.
For New Mexico, that means combining features of both a traditional retail sales tax and a broader gross receipts tax. This summer, the state tax shifted from origin-sourced to destination-sourced for both goods and services, meaning the local rate is now levied based on the delivery location rather than the seller’s location. Beyond that, New Mexico’s gross receipts tax has different rules for certain businesses. For example, professional services sales will still be taxed where the seller is located.
Citing unfair competition, to offset inconsistencies in allocation, the state also changed the way it deals with out-of-state businesses that aren’t subject to gross receipts taxes by implementing a compensating tax—an excise tax imposed on those using property or services in New Mexico.
The hybridization of New Mexico’s transaction taxes has created a ripple effect for businesses both in- and out-of-state that wouldn’t have been easy to catch for a corporate tax team. This regulation will also impact marketplace facilitators and providers.
While state and local governments are trying to cobble together new sources of revenue through an expanding tax base, it’s easy for tax teams to miss the multitude of changes to current transaction taxes, as well as the creation of new hybrid taxes. In fact, it’s nearly impossible to track without the help of effective and enhanced tax technology.
Small and mid-market companies can’t ignore the need for efficient ways to track new taxes and rate changes. It’s daunting to think about the potential risk presented by the more than 11,000 sales tax jurisdictions in the United States, any of which could trigger a compliance issue if a regulatory change is missed. But by harnessing the power and capability of cloud-based tax technology, the challenge isn’t so intimidating.
In fact, much of the heavy lifting can be taken on by an outside vendor with teams that continually update software to reflect the latest sales tax rules and rate changes. The software can take on everything from jurisdiction identification and exemption management to sales tax rate calculation and tax reporting.
Put simply, a cloud-based solution can automate the end-to-end tax process to improve accuracy and increase internal efficiency, resulting in less audit exposure.
Since state and local governments are increasingly reliant on sales tax revenue, companies must understand sales tax calculations as a key corporate functional activity. In the aftermath of the pandemic crisis, companies need to make sure their tax compliance systems are more accurate and timely, and automate transactions with little or no friction.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Michael Bernard is vice president tax content and chief tax officer—transaction tax, leading the Tax Research Group and Chief Tax Officer for Vertex. He is responsible for insights and thought leadership around tax department operations, U.S. indirect tax, tax risk management, and tax policy, as well as emerging tax trends. Additionally, he leads a group of over 100 tax accountants, CPAs, and attorneys who are responsible for maintaining and building the global tax content library for Vertex’s tax impositions and tax returns.
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