Transaction Tax: The Whirlwind of Change
Weather in March. The latest social media platform. Tax rates. What do these three things have in common? Near-constant change.
To say there have been a significant number of changes to sales tax rates and rules across the years is an understatement. In the United States, 2,172 new sales and use taxes have been introduced and 3,985 rates and rules adjustments occurred since 2007, as jurisdictions sought to close budget gaps. According to the most recent Vertex Inc. report, there were 556 transaction tax changes last year alone.
These dynamics create a complex and challenging environment for businesses that need to keep up with multiple levels of taxation and understand applicable changes to avoid serious consequences of noncompliance.
Let’s take a closer look at the trends these changes represent, what we’re likely to see moving forward, and what tax professionals and businesses need to know.
What Trends Played Into These Changes?
As states and municipalities struggle to fund government programs and introduce new services and investments, they adjust sales tax rates and look for ways to stop tax revenue leaks.
Recently, one way US jurisdictions have addressed this is by enacting new taxes or increasing rates on goods deemed unhealthy, like tobacco or sugar. The city of Philadelphia is one of the latest examples of a jurisdiction introducing a soda tax that impacts the prices of sweetened drinks, but at the same time has the potential to generate significant revenue for the city.
The way consumers purchase goods has changed dramatically since the introduction of online retailers, like Amazon and Zappos. According to a study by UPS conducted in 2016, more than 50 percent of respondent purchases were made online. While convenient for shoppers, e-commerce introduces a dilemma for states and municipalities and impacts tax revenue.
Although the US Supreme Court’s 1992 decision in Quill Corp v. North Dakota established that a physical presence was required in order for a state to collect sales tax, there is a noticeable trend among states to enact regulations that ignore the physical presence standard and require remote e-commerce sellers to collect and remit sales and use tax.
A few states have enacted information-reporting laws, and some companies have actually responded by advising their customers that they need to pay tax on the products or services they are buying. These indicators, coupled with the ongoing growth of e-commerce, suggest we may see related tax changes in the coming years.
What Does This Mean for Tax Professionals and Businesses?
One location can fall under up to state, county, city, and multiple special-purpose district taxes. On top of that, companies need to understand and manage different types of taxes depending on the kinds of goods they are selling or services they are providing. This complexity further intensifies for organizations that operate in multiple locations or don’t have a physical presence but sell into various states.
Between the sheer quantity of changing rules and varying tax rates, legislation ambiguity, and tax code complexity, it’s nearly impossible and certainly not wise for businesses to attempt to manage taxation on their own. Outsourcing tax management to experienced professionals allows business owners to focus on running and growing their companies.
When it comes to corporate taxation, software that simplifies tax processes, improves compliance through automated rate and rules adjustments, and provides support during grueling audit processes is crucial.
Jurisdictions will continue looking for ways to increase tax revenue, and businesses of all sizes need to be prepared to handle constant tax code adjustments and establish a tax strategy to benefit their bottom line. This preparation starts with the important question: How did tax rates and rules change in 2016?