Hot Topics: Sales Tax Rates

Sales tax compliance depends on many factors. One of the most important – and the most incessantly changing – is the tax rates that America’s thousands of jurisdictions impose.

These rates change all the time – if not the actual percentage, then the exemptions and other special rules that can seem nothing short of picayune for a business just trying to stay on the right side of sales tax laws.

For example, California recently expanded its sales and use tax exemption for new, used or remanufactured trucks and new or remanufactured trailers or semi-trailers.

Colorado recently enacted a use tax exemption for construction materials used to build and renovate public schools across the state – and included localities, which can be rare in such a home-rule state which can dozens of smaller tax jurisdictions within it.

Exemptions can also seem whimsical: New York charges different sales tax on a bagel that’s sold as-is or has been toasted and smeared with cream cheese.

Every year sees dozens if not hundreds of sales tax changes nationwide.

Why rates might change?

Some law changes can seem more like political statements than tax policy. Take sales tax holidays, which have exploded in recent years on everything from school backpacks to gun-safety equipment. Despite the sometimes controversial nature of these tax breaks they continue to be offered in many states, with Florida leading the way.

Among other reasons for rate changes:

• Speaking of political tax breaks, exempting groceries from sales tax continues to be popular (Kansas and Tennessee are among the latest states to greenlight such exemptions). Tracking your sales tax obligations on food is especially tricky as a galaxy of conditions – does the food contain sugar or chocolate? is it grown locally? served with utensils? – can figure in determining the rate.
• New products are frequently a reason for altering existing rates or creating new ones. In Georgia now, sales of specified digital products, goods and codes sold to an end user in the state are now subject to the state’s sales and use tax under certain conditions. More and more states, like Kentucky, are also starting to impose sales tax rates on services, which historically was an area free of sales tax in many states.
• Rate changes can run contrary to usual trends. As discussed in our recent “Hot Topics” webinar, Alabama cut its state sales tax rate on food from 4% to 3% effective Sept. 1, 2023, and perhaps will be reduced to 2% this coming Sept. 1 if certain other budgetary factors are met.
• Similarly, South Dakota has reduced its state sales tax rate through June 30, 2027, to 4.2% from 4.5%. Exemptions may mushroom, but rates don’t often go outright down.

This is just a sample of recent sales tax rate changes. How often do you have to review ever-changing rates? We recommend that clients who calculate their sales tax manually look every six months at the rates in states where they have nexus.

Next time, we’ll look at developments in delivery fees.

(For more, listen to our “Hot Topics” webinar about the latest developments in sales tax.)

If you think your business may be impacted by sales tax developments, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more.