States with the most local jurisdictions to manage

The 2018 Supreme Court Wayfair decision opened the floodgates for states to mandate sales tax obligations for online businesses. Too bad states aren’t the only ones giving you a sales tax headache. Counties, cities, towns, districts, parishes: Thousands of smaller tax jurisdictions add their own wrinkles to your sales tax problem.

It can be easy to overlook these jurisdictions until it’s too late. Where are these jurisdictions and how can you manage your obligations in them?

Size doesn’t matter 

Local tax obligations generally begin with states’ economic nexus thresholds. Some states have no tax jurisdictions other than the state-wide one. Others, like Texas, Iowa and Missouri, have more than a thousand. Just look at the advanced jigsaw puzzle that’s the jurisdiction map of Illinois or the lengthy chart for Alabama.

Yet these states, infamous along with Colorado and Louisiana for complex sales tax systems, have at most half the number of internal tax jurisdictions as does Texas. Population or physical size doesn’t necessarily determine the number of jurisdictions: According to 2020 information from the Tax Foundation, New York, Florida and Alaska combined have fewer than California, which itself has fewer jurisdictions than Kansas or Oklahoma.

Home rule and other special cases 

In “home rule” states, jurisdictions can pass their own, additional tax laws for remote sellers, able to both set their own sales tax administration and their own sales tax bases – potentially increasing registration, filing, and remittance deadline burdens on remote sellers.

Many have home rule jurisdictions but some of the more confusing ones are Alaska (where communities have banded together to create sales tax in the absence of a state-wide one), Louisiana and Colorado. The latter has always been one of the more difficult states when it comes to managing sales tax. In Colorado, more than a third of Colorado municipalities are home rule, most with their own tax administration.

Adds The Tax Foundation, “In Alaska, Colorado, and Louisiana, this issue is compounded by the additional challenge of divergent tax bases, where different jurisdictions tax different baskets of goods and services.”

Another form of local tax jurisdiction aside from municipalities is also the special taxing district, where you might encounter a small additional sales tax that the area has mandated to fund a particular program or purpose, such as transportation, infrastructure or economic development.

Not all local jurisdictions work against remote sellers, or at least against their customers’ wallets. New Jersey, for example, has Urban Enterprise Zones where some qualifying sellers can collect and remit 3.3125%, half the state sales tax rate. The idea is to help local retailers compete with sales tax-free Delaware next door.

Filing, and the future 

The number of jurisdictions in a state is not indicative of the complexity of collecting and remitting sales tax – and filing what could turn into a blizzard of sales tax returns. In California, for instance, if you have sales tax nexus and your products or services are subject to sales tax, you charge the state and local level taxes together, usually as an overall combined tax rate. Texas also uses an accumulated overall rate that combines its statewide rate with rates of its numerous jurisdictions.

In Alabama, you can apply a single tax rate (what the state calls its Simplified Sellers Use Tax, or SSUT) across the state and report all tax on a Remote Seller Return. Ditto Louisiana, where that state has different tax rates that apply at the local level rather than the single rate in Alabama. (Louisiana, incidentally, has the highest combined state/local sales tax rate in the U.S., some 12%.)

Physical nexus, such as a warehouse or office, can also complicates this. In many states you need to make the nexus determination at the local level before determining whether you have the obligation to collect the local sales tax.

Last Election Day capped a banner year for proposed local sales tax on ballots nationwide. Some measures passed; many failed. Communities were often closely divided when considering local sales tax – but governments of all sizes have only begun to explore new ways to raise revenue. Expect local sales taxes to only get more complicated.

Let TaxConnex manage the burden of keeping up with the changes and challenges of sales tax obligations. Contact us to learn what it means when your sales tax compliance is all on us.