Why are there over 100,000 Sales & Use Tax rates in the US?

The prospect of managing more than 100,000 tax rates can intimidate even the most experienced tax professionals.

But that’s exactly the task facing businesses trading in the US, where over 100,000 rates for Sales & Use Tax alone are currently in existence.

Your first response may be to ask: Why are there so many rates in the US?

It’s a fair question, but you’ll be surprised at how several of the cornerstones of tax in the US combine to generate an extraordinary number of rates.

So, here we’ll attempt to dissect the primary factors that combine to create such a remarkable number of rates and make the US tax system one of the most comprehensive in the world:

1) 50 states setting their own rates

Unlike in most European countries where VAT is levied at a national level and only a small number of rates are used (typically standard, reduced and zero rates), things are different in the US.

In the States, Sales Tax can be charged at the state, county and city level. Across the 50 states, 45 have Sales Tax (Alaska, Delaware, Montana, New Hampshire and Oregon do not) and 38 of those also have at least one local Sales Tax.

Multiply the number of states by the various jurisdictions within them and the vast range of goods and service categories and it starts to become easier to see why so many rates are required.

Consequently, as a consumer, you could be required to pay a certain rate on a particular item in one location, while exactly the same product will be liable for a different rate one street, district or town away.

Imagine being a business responsible for working out the precise location of sale, as well as the good or service category and all manner of other data required to determine the only relevant rate…

And the complexity of the US system does not end there. Additionally, there are district taxes, such as police or school levies, and even special taxes for transport, tourism and health.

2) State-specific taxes

Did you know that many states have separate classifications for taxable items where a different rate can apply?

Take a look at just a few examples:

Florida: Commercial Rent Tax

Illinois: Alcohol and tobacco taxes

Louisiana: Hotel Occupancy Tax

Minnesota: Waste Management Tax

Mississippi: Tourism Tax

Nevada: Live Entertainment Tax

Ohio: Emergency Services Tax

Some of these taxes are applicable in addition to the general Sales Tax, while others are instead of it. Either way, they contribute to the growing tally of tax rates that can be applied to transactions and edge us closer to our headline figure of 100,000.

3) The prevalence of Use Tax 

You will likely be aware of Use Tax. While Sales Tax is applied at the point of purchase and collected and remitted to the government by the seller, Use Tax is calculated and paid by the consumer of end user.

In most states, managing Use Tax is similar to Sales Tax as the same rates are used for each.

However, in some, such as Colorado for example, there are different rates for Use Tax. It might seem bizarre, but in cases such as this it can actually be cheaper to buy goods or services from another state so that you can apply that state’s Use Tax than it is to buy locally!

And to ensure consistency in applying rates, you cannot simply record the various Use Tax rates to be used if they vary from the Sales Tax rate. Instead, you’ll be required to store both the Sales Tax and Use Tax for every rate as a minimum so the tax logic within your tax solution can determine if it is Sales Tax or Use Tax.

Once that decision has been made, the rate linked to that tax type and jurisdiction will be selected.

How your business should manage Sales & Use Tax

Incredibly, we still speak to tax professionals at global businesses who manage Sales & Use Tax manually.

That means tasking tax clerks with using a search engine to identify the rate they need for each transaction; a process that is prone to error and inefficiency.

Instead, we believe leveraging quality tax technology is essential in determining and applying Sales & Use Tax in the US.

You could use a US Rates file, just like ours, or you could implement a third-party tax engine. Or if you really want to waste time and increase your risk of inaccuracy, you could continue to manually maintain your US rates.

For more information on managing US Sales & Use Tax, get in touch with us today and we’ll help you to plot your path towards fast, accurate and reliable determination – whether that’s using a US Rates file or a third-party tax engine.