Sales Tax Scaries 5: Changing Rates

When the Unexpected Strikes in Sales Tax

A lot of monsters get their traction in horror movies because they’re doing the unexpected. Similarly, when you sell across multiple states, one scary problem quickly emerges: how fast and how often sales tax rates change. 

Unlike federal income tax, which has just seven brackets, states levy sales tax over a huge range. From the states with the highest combined state and local taxes (pushing 10%) of Louisiana, Tennessee, Arkansas and Washington to the lows of Alaska, Wyoming and Maine, there is a lot for a growing e-commerce company to track. 

A Patchwork of Tax Rates Across the U.S.

There are several sales taxes nationwide because retail sales taxes are an essential part of most states’ revenue, responsible for almost a third of state tax collections and 13% of local tax collections. Forty-five states and the District of Columbia collect statewide sales tax. The NOMAD states of New Hampshire, Oregon, Montana, Alaska and Delaware have no statewide sales tax – but online sellers aren’t off the hook in Alaska, where localities continue to band together to create a web of sales taxes. Each state has varying revenue requirements depending on population, infrastructure, social programs and other services. 

Some states also allow cities and counties to impose their own sales taxes, leading to secondary patchworks of rates within the same state. Local sales taxes crop up in 38 states, according to the Tax Foundation, add-ons that often inflate the total sales tax rate a customer pays – and the complexity for businesses trying to stay compliant.

Why Sales Tax Rates Differ from State to State

Other reasons for varying rates: 

• States use sales tax policies to attract residents, businesses and tourists. Additionally, some states hold sales tax holidays on items like back-to-school supplies, gun-safety equipment or emergency preparedness gear to encourage consumer spending. (Despite the sometimes controversial nature of these tax breaks as vote-getting stunts of no real commercial value to consumers or businesses, they continue to be offered in many states.)
  
  
• Exemptions and exclusions complicate tax rates. Many states exempt essential items like groceries or prescription medications, impacting the overall effective tax rate.
  
  
• State legislatures respond to economic trends and shifts in public priorities. For example, in response to environmental concerns, some states have recently added retail delivery fees or adjusted tax policies to promote sustainability. 

When Sales Tax Changes Come Frighteningly Fast

Sales tax rates change all the time – if not the actual percentage, then the exemptions and other special rules that can seem nothing short of maddening for a business that’s just trying to stay compliant. Election days almost only find sales changes on the (usually local) ballot, and many pass. Just recently, Louisiana greenlighted a slew of changes, Missouri and Alabama issued new exemptions and Washington geared up to being taxing services.  

Why Do Sales Tax Rates Keep Changing?

Why might rates change? For one, some law changes can seem more like political statements than tax policy, such as sales tax holidays. Speaking of political tax breaks, exempting groceries from sales tax continues to be popular (Arkansas and Illinois are among the latest states about 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? – can figure in determining the rate. 

New products are frequently a reason for altering existing rates or creating new ones. In Georgia, for instance, 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. Rate changes can also run contrary to usual trends: South Dakota, for instance, reduced its state sales tax rate through June 30, 2027, to 4.2% from 4.5%. 

How to Stay Ahead of Ever-Changing Sales Tax Rates

Depend on sales tax changes going on and on like a bad horror movie. We recommend that clients who calculate their sales tax manually look every six months at the rates in states where they have economic or physical nexus. 

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.