Report indicates big increase in state sales taxes

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State governments have boosted sales tax rates to the highest levels in 28 years, according to a new report by Vertex, an enterprise tax software company.

Vertex reports that the average state sales tax rate was 5.52 percent in the first nine months of 2010, which is slightly higher than the 5.48 percent recorded for last year, the previous record high.

Budget shortfalls are causing state and local governments to turn to sales taxes to make up the difference. Sales taxes generate more money overall than taxes on property or income. Sales taxes generated approximately $450 billion in 2008, according to the U.S. Government Accountability Office, while the numbers for property taxes and income taxes were $411 billion and $310 billion, respectively.

“Based on the rate level for the first nine months of 2010, and our internal forecasts for the last quarter of the year, it appears that the average sales tax rate will be at a new record high by December 31, 2010,” said John Minassian, a Vertex vice president.

State revenues are just starting to pick up, but only slightly, according to the National Conference of State Legislatures (NCSL) in a reportissued last month.

Sales and use taxes make up nearly 32 percent of state taxes, the report states. Forty-five states levy this tax, and the outlook for collections is more optimistic than last year. Thirty-four states expect sales tax collections to rise above FY 2010 levels, with Colorado projecting a 14 percent year-over-year increase.

Colorado didn’t raise its sales tax rate this year, but dropped exemptions on items that previously went untaxed, such as candy and soda. The state dropped a property tax break for seniors and put limits on a tax credit for alternative-fuel vehicles, according to, which reports daily on state policy and politics.

Colorado also enacted what some call the Amazon tax, by applying state sales taxes to Internet purchases. The state required and other Web retailers to mail tax liability notices to their customers. In response, Amazon shut its Colorado affiliate program, hurting businesses that marketed Amazon products online, reported.

States could receive millions of dollars if they received taxes for online purchases, and the potential revenue source is a subject of political debates this season. In Idaho, the National Conference of State Legislatures (NCSL) estimates it could gain up to $103 million from online sales taxes, and a Superintendent for Public Instruction candidate wants online companies to tax customers upfront and send the money to the state, reported. The process has been fraught with legal difficulties in other states, however.

Virtually all states were in “survival mode” this year, according to Collectively, states were forced to eliminate more than $100 billion in funding gaps for the new fiscal year that started July 1.

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