Sales, Use Tax Rate Hits Record High

Congressional budget wrangling and local property tax imbroglios grab most of the headlines and tweets these days, while rising sales and use taxes go largely unnoticed.

Yet the average combined U.S. sales and use tax rate for 2010 hit a new record average of 9.64 percent, compared to the previous record of 8.63 percent in 2009, according to the annual Sales Tax Rate Report for 2010 issuedearlier this monthby Vertex Inc.,aprovider of corporate enterprise tax solutions.

The combined sales and use tax rate of 9.64 percent, which includes U.S. state, county, local and special purpose tax districts, is the highest level since Vertex began tracking the data in 1982.

Vertex found that as of December 31, 2010:

• The average state level sales tax rate increased to 5.52 percent, compared to 5.48 percent in 2009.

• The average county tax rate increased to 1.55 percent, compared to 1.54 percent in 2009.

• The average city tax rate increased to 1.66 percent, compared to 1.65 percent in 2009.

“The combined average sales tax rate hit a record level at the end of 2010 due to the budget deficits being experienced at every level of government,” said John Minassian, Vice President Tax Content Development for Vertex. “Budget-weary governments turned to new and increased taxes in 2010 to help offset these deficits and in some instances, stave off painful cuts.”

The number of sales and use tax rate changes in the U.S. in 2010 decreased to 555 compared to 707 in 2009. Of the 555 changes, 273 were tax increases, 249 were new taxes and 53 were decreases.

As of December 31, 2010, California remained the state with the highest sales tax rate at 7.25 percent. Five states – Indiana, Mississippi, New Jersey, Rhode Island and Tennessee – have the second highest rate, 7.00 percent.

Three states had rate changes during the year:

• Arizona increased its sales, use and rental rate to 6.6 percent from 5.6 percent

• Kansas increased its sales tax rate to 6.3 percent from 5.3 percent

• New Mexico increased its rate to 5.125 percent from 5.0 percent

Additional highlights from Vertex’s 2010 Sales Tax Rate Report:

• The highest city sales tax rate is found in Wrangell, Alaska (7.0 percent).

• The highest combined sales tax rate of 13.73 percent is found in Tuba City, Coconino County, Arizona. 

• The combined number of new and changed sales and use tax rates since 2003 is 5,407, an average of 676 per year.

• Since 2003 there have been 1,934 new sales and use taxes, an average of 242 per year, and 3,473 sales and use tax changes, an average of 434 per year.

“While the average rate reached a record level, the total number of sales and use tax rate changes in the U.S. did decrease in 2010,” said Minassian. “The overwhelming majority (94 percent) of these changes continue to be new or increased taxes signaling that we continue to experience fallout from the recession. However, the decrease in the total number of changes may be indicative of some level of economic improvement for governments and taxpayers alike.”

A fertile field that is increasingly catching governments' gaze is online retailing.

Last week, the U.S. Commerce Department reported that online retail sales totaled $44 billion in the fourth quarter last year, up from $38 billion a year earlier. E-commerce sales totaled $165 billion for all of 2010.Perhaps even more startling, e-commerce now accounts for 4.3% of total retail sales, up from a scant 1% just a decade ago.

In theory, citizens of most states are supposed to report their purchases and pay the taxes on them if they're not collected by the merchant. This is about as widely observed as the speed limit and, except for New York and a few other states, no attempt is made to compel online retailers to collect the sales tax on purchases shipped into the state.

One reason for this is that, in a libertarian moment back in the infancy of the Internet, the U.S. Supreme Court ruled that states could not force retailers to collect sales tax unless they had a physical presence in the state where the order was being shipped.

This has led to some interesting stand-offs and some rapid decisions to move facilities around the country. Perhaps most notable is the recent dust-up between Texas and Amazon.com. Last fall, Texas decided that an Amazon.com distribution center in Dallas amount to a physical presence and sent Amazon a bill for $269.

Amazon responded by saying it will shut down the center and move its operations out of Texas.

As local governments become more desperate for money, it's likely there'll be more stand-offs like that between Amazon and Texas. It may be that the no-sales-tax states corner the market on e-commerce distribution centers.