september2021 - 8

COVER STORY
Transaction Tax Will Take
Bigger Piece of State
and Local Revenue Pie
By Michael Bernard
Nearly 18 months after the pandemic sent states
and local jurisdictions searching for emergency
funding to keep citizens services running and help
prop up economies, the same localities are making
transaction tax a bigger part of their revenue streams.
Thankfully, due to federal aid, most states
continue to weather the economic and fiscal
challenges they face as a result of the pandemic.
But without the guarantee of more money from
Congress, states and other local districts and
jurisdictions are looking for ways to build up their
revenue streams in order to fund operations.
In more daunting cases, a handful of states
whose revenues rely on taxes generated by energy,
transportation,
tourism and other hard-hit
industries still face steep budget gaps. Many local
jurisdictions are struggling to rebound as well.
Broadening the tax base through new transaction
taxes or raising transaction tax rates is
proving to be a popular way to handle both of
those situations.
THE YEAR SO FAR
Tax authorities have one of two levers with
which to generate revenue in response to budget
shortfalls-they can raise tax rates or expand
the tax base. So far, in the very beginning of the
COVID era, it appears that more tax jurisdictions
are leaning toward base expansion.
New district sales taxes have been rising
at a rapid clip this year. These include school
districts,
fire districts or any public service
not contained in a city, state or county budget.
Through the end of July, 163 new district taxes
have been enacted. During the first six months
of 2020, only 88 new district taxes materialized.
If the current pace continues for the rest
of the year, 2021 would see the enactment of a
record number of new district taxes, exceeding
the 237 new district taxes that appeared in 2017.
Beyond that, both districts and cities have
seen elevated levels of sales tax rate changes.
Through July, there were 34 district rate changes.
That's compared to 36 for all of 2020. Cities are
set for a record pace of sales tax rate changes. So
far there have been 191 through July. The record,
set in 2017, stands at 254 city rate changes.
WHAT COMES NEXT
Sales and transaction taxes already represent a
substantial component of total state and local
revenue-an average of 33%-in jurisdictions
that charge sales and use tax. Compared to income
and property taxes it's far easier to administer,
collect and audit sales tax since there are fewer
exemptions and collections happening on a more
frequent basis.
Because of that, sales tax will continue to
proliferate and probably become a greater part
of the overall revenue picture for state and local
governments. That doesn't just mean higher
sales taxes. In fact, it will most likely mean new
transaction taxes. Various forms of digital taxation,
including extending sales taxes to streaming video
and music services will continue to proliferate tax
policy discussions in 2021 and beyond.
Indirect tax teams should also continue to
monitor ongoing post-Wayfair VAT changes internationally.
For example, in Europe, marketplaces
and online vendors had a very short window to
prepare for VAT e-commerce changes that took
effect in the European Union (EU) on July 1, 2021.
8 SEPTEMBER 2021 ■ www.CPAPracticeAdvisor.com
HOW TO DEAL WITH IT
Small and mid-market companies have to find
efficient and effective ways to track and comply
with all these new taxes and rate changes. Many
of them are turning to cloud-based tax technology.
These solutions are attractive for a few reasons,
including their implementation speed and ease of
use. Vendors-not tax teams-continually update
the software to reflect the latest sales tax rules and
rate changes so nothing is missed.
A good cloud-based tax platform will take
everything from jurisdiction identification and
exemption management to compliance and integrations.
Beyond that, cloud solutions scale quickly and
easily, and subscription options mean there's a good
fit for almost any company.
Put more simply, a cloud-based system can
automate the end-to-end tax process to improve
accuracy and increase internal efficiency. This
means fewer audits and even fewer surprises.
With states and other local tax jurisdictions
searching for new sources of tax revenue coupled
with the record setting pace of new and higher sales
taxes, companies cannot afford to take on the task
by themselves.
The ongoing pandemic landscape is still being
shaped and things are bound to get more complex.
Finding a technology partner to track and integrate
every applicable tax change is critical to compliance
and avoiding costly audits. ■
Michael Bernard is chief tax officer for Vertex Inc.
http://www.CPAPracticeAdvisor.com
september2021

Table of Contents for the Digital Edition of september2021
