lncome tax is out. Retail sales tax is in.

That’s just one of the trends likely to affect sales tax in 2024.

State budgets will grow increasingly dependent on sales tax revenue in 2024 and beyond, as almost 30 states have lowered corporate or personal income tax rates since the start of 2021. But “states wishing to transition from income toward consumption taxation will eventually need to reckon with long-standing issues facing the sustainability of state sales taxes,” according to the National Conference of State Legislatures.

Though sales tax is the second-largest source of state tax revenue, evolving consumer and technology trends are eroding the sales tax base. Many sales tax laws need to be updated.

For instance, most states don’t tax the majority of services, even though services now account for approximately 70% of all personal consumption. Per the National Conference of State Legislatures, Hawaii, New Mexico, and South Dakota are the only states where a significant majority of 176 specified services are subject to sales tax.

Moreover, despite the rise of digital goods and streamed content and the corresponding demise of the CD, DVD, and floppy disk, about half of all states still don’t tax digital products or streaming services.

This is a byproduct of changing technology. States haven’t changed what they tax; they still tax what’s sold on a CD, DVD, or floppy disk. What’s changed is that very little is delivered by CD, DVD, or floppy disk today.

“The taxation of streaming services has long been complicated by advancements in technology as well,” says Scott Peterson, VP of Government Relations at Avalara. “Long ago, cable television began to compete against broadcast television. TV watchers didn’t pay to receive broadcast television, so there wasn’t anything to tax. Cable television was different because there was a charge. lt didn’t take governments long to start taxing cable television.”

Many states are further weakening their sales tax base by establishing new sales tax exemptions – either permanent or temporary – for a range of consumer goods. Vet most states continue to tax many business inputs (which economists argue should be exempt).

Should certain taxable transactions be exempt? Should sales tax apply to currently exempt transactions? Are there any new and creative ways to obtain more tax revenue from retail sales? As 2024 unfolds, expect states to grapple with these questions – and more.


Questions? Contact our Sales Tax Team!


(source: Avalara)

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