State and Local Sales Tax Rates, Midyear 2023

Did you know that in 2023, Tennessee's combined state and local sales tax rate hit 9.54%, tying Louisiana for the highest in the nation? Imagine how these numbers impact your pricing, profit margins, and compliance strategies. In the complex maze of sales tax, staying updated isn’t just a best practice; it’s a business necessity. You could face penalties, unhappy customers, or even profit losses with one wrong move.

From midyear rate changes in Colorado and South Dakota to new consumer-friendly exemptions in Ohio and Texas, every shift directly impacts your business operations and bottom line. Are you prepared to navigate these changes effectively?

In this blog, we'll explore how these recent transformations affect businesses nationwide, revealing opportunities hidden within the chaos. We'll use insights from authoritative sources like the Tax Foundation and state tax departments to guide you through strategies to survive and thrive in this dynamic landscape.

Midyear Sales Tax Transformations

As the saying goes, "The only constant in life is change," and the sales tax landscape is no exception. Midyear reviews have revealed significant shifts in tax rates nationwide, requiring businesses to plan accordingly to avoid costly pitfalls.

Key Highlights from the Report:

• Local Sales Taxes: In many regions, local sales taxes can exceed state rates. Businesses must diligently understand the specific tax rates within the jurisdictions where they operate.
• Highest Combined Rates: The states with the highest average combined state and local sales tax rates are Tennessee (9.54%), Louisiana (9.54%), Arkansas (9.44%), Washington (9.4%), and Alabama (9.24%). High rates in these states significantly impact businesses, particularly in terms of pricing strategies and customer costs.
• Statewide Sales Tax Rates: California has the highest statewide sales tax rate at 7.25%, which directly impacts businesses selling to consumers in California. Meanwhile, Colorado has the lowest non-zero state-level sales tax rate, 2.9%, offering a more favorable business environment.
• Recent Rate Reductions: South Dakota reduced its state sales tax rate from 4.5% to 4.2% on July 1, 2023, following New Mexico's rate cut in 2022. Businesses in these states must adjust their tax collection and pricing strategies to reflect these changes.

Consumer-Friendly Tax Benefits

Are you struggling to keep up with the ever-changing sales tax regulations? You're not alone. Fortunately, some states are introducing consumer-friendly tax benefits that could ease the burden—if you know where to look.

In 2023, several states implemented tax benefits and exemptions designed to help consumers but require businesses to adapt quickly:

• Alabama's Tax Reductions: Starting September 1, 2023, Alabama reduced its sales tax on food from 4% to 3%, with a possible further reduction to 2% if specific state revenue growth criteria are met by September 1, 2024. This reduction impacts businesses selling food, affecting both pricing and revenue.
• Kansas Eliminates Delivery Charges Tax: As of July 1, 2023, Kansas no longer collects sales tax on separately stated delivery charges like shipping, handling, and crating. This change can simplify your tax collection process and reduce costs for your customers.
• Ohio Expands Sales Tax Exemptions: Effective October 1, 2023, Ohio expanded its sales tax exemptions to include various children's products such as diapers, healing creams, infant-restraint devices, cribs, and strollers. This trend toward tax relief on essential goods benefits both businesses and consumers.
• Texas Removes Tax on Essential Baby Products: Starting September 1, 2023, Texas removed sales tax on essential baby products like diapers, wipes, and menstrual products. This change is part of broader efforts to reduce the cost of essential goods and simplify business tax compliance.

The Role of Competition in Setting Sales Tax Rates

Ever wonder why some states have such high rates while others remain low? Sales tax competition is real, and it impacts how businesses and consumers behave.

Research shows that when tax rates differ significantly between jurisdictions, consumers will go out of their way to make purchases in lower-tax areas. For example, consumers in Chicago, where the tax rate is 10.25%, often shop in nearby suburbs or online to save on big-ticket items.

On a broader scale, businesses strategically choose locations to avoid higher tax rates. For example, in New England, many retail stores set up shop on the New Hampshire side of the border, where there's no sales tax, instead of on the Vermont side. This strategy has led to a significant difference in per capita sales, with tax-free New Hampshire seeing sales triple since the 1950s.

At one point, Delaware" even had a highway sign welcoming motorists with “Home of Tax-Free Shopping."

Income Tax Adjustments in New Jersey

New Jersey introduced significant changes to its corporate tax rules in 2023.

This aligns New Jersey with other states implementing similar rules for collecting sales tax revenue from out-of-state businesses. Understanding these thresholds and ensuring compliance is critical for companies operating in New Jersey to avoid unexpected tax liabilities.

• Texas' Penalty Waiver for Out-of-State Contractors: A contracting services provider from out-of-state had penalties waived in Texas for failing to report sales tax and corporate income tax returns. The taxpayer’s reliance on professional advice and corrective measures was vital to the waiver decision. This case underscores the importance of seeking expert guidance and taking corrective actions to comply with state tax laws.
• New Mexico'staxpayer's Updated Gross Receipts Tax Guidance: The New Mexico Taxation and Revenue Department updated its guidance in FYI-206 to outline gross receipts tax collection duties for online marketplace vendors and sellers. The new guidance reflects a reduced gross receipts tax rate of 4.875% for out-of-state taxpayers and introduces Form TRD-31117 for reporting and paying gross receipts tax. Businesses operating in New Mexico must stay informed about these updates to ensure compliance.
• Texas Sales Tax on Licensed Software Applications: In Texas, a taxpayer faced a sales and use tax assessment on the sale of licensed software applications. The taxpayer argued that they were exempt from remitting tax before October 1, 2018, due to a lack of nexus in Texas. However, evidence suggested otherwise, leading to the assessment. This case highlights the complexities of determining nexus and the importance of maintaining thorough documentation to support tax positions.

Turning Challenges into Opportunities

Staying ahead in the sales tax landscape isn’t easy, but you can turn these challenges into opportunities with the right strategies. Being proactive is key, whether it's understanding the latest tax rate changes, adjusting to consumer-friendly benefits, or navigating specific tax updates.

By staying informed and leveraging tools like Kintsugi's automated sales tax compliance platform, you can streamline your processes, ensure compliance, and keep your focus where it belongs—on growing your business.

Let's navigate these changes together and turn the complexities of sales tax compliance into opportunities for growth and success.