Election Day brings changes to sales taxes too

While the focus in the latest general election has been the presidential race, there were plenty of local ballot issues that will affect small businesses in a very personal and immediate way. These include votes on sales taxes, several of which were passed in major metropolitan areas.

Small businesses need to be aware of sales tax changes so that they are charging the right rate. But there may be other effects of sales tax changes on small businesses, such as when a sales tax rate increase may encourage customers to purchase in lower-tax locales, for instance.

Here’s a rundown of some of the major sales tax ballots across the country and the results.

Sales tax restriction

Approved: Missouri Constitutional Amendment 4. This was probably the most far-reaching sales tax issue on the ballot in the U.S. While most sales tax ballot measures proposed sales tax increases, the Missouri measure will limit sales taxes, preventing the state from levying sales tax on any new service or transaction that was not subject to sales tax as of January 1, 2015.

The measure was put forward by the Missouri Association of Realtors as a way to protect real estate services from being taxed, but broadly prohibits any new sources of sales taxes.

The measure can be seen as a reaction to a trend in which states with stretched finances have increasingly sought new sources of revenue. In recent years, services have become much more of an economic engine, now making up approximately two-thirds of the current United States economy. In tandem with that growth, states have increasingly looked to services as a new base for sales taxes.

For small businesses that provide services or sell goods that are not now subject to sales taxes in Missouri, the certainty that they will not have to deal with sales taxes in the future will probably be a source of relief.

However, the other side of the story is that limiting the sources of sales tax revenue could mean higher sales tax rates on eligible transactions, since the state is now restricted to those categories. Allowing new categories of transactions to be taxed would spread taxes over a larger number of transactions, meaning that the overall sales tax rate would not necessarily need to be as high. Restricting the sales tax base could also hamstring states’ abilities to reform their tax codes in order to stay competitive.

It remains to be seen whether other states will see similar proposals to limit sales taxes.

Sales tax increases

All the other sales tax ballot measures in the Nov. 8 election dealt with raising sales taxes in states and major metro areas.

California

A handful of big metro areas in California sought sales tax increases for transportation funding.

• Approved: Measure M in Los Angeles County. This will raise the county’s base sales tax rate by 0.5% to 9.5% effective January 1, 2017, with local sales taxes going on top of the base rate. The tax rate hike will increase to 1% in 2039 and continue indefinitely. The increase will raise an estimated $860 million per year for the most ambitious transit expansion in Los Angeles County history, including expanded rail lines.

Currently, Los Angeles’ sales tax is the 13th highest of major cities in the United States; the new 9.5 percent sales tax means L.A. will tie with Oakland for eighth highest, according to the Tax Foundation.

• Defeated: Measure B in Sacramento County would have raised the sales tax by 0.5% for 30 years, bringing the combined sales tax rate to 8.5 percent in Sacramento County and 9 percent in the City of Sacramento. The funds raised would have gone toward transit projects including a new expressway, a downtown Sacramento streetcar and a light rail extension to the airport. The measure was opposed by taxpayer activists who pointed to the Measure A sales tax already in effect that would have overlapped with Measure B for 20 years.

• Defeated: Measure A in San Diego County would have raised the sales tax by 0.5% to 8.5% for 40 years in order to pay for new rapid bus lines and a trolley line, among other transit improvements. Local Republican and Democratic parties, environmental groups, labor unions and transit advocates opposed the measure for different reasons.

San Francisco

Defeated: Proposition K in San Francisco. San Francisco’s sales tax increase measure was unique in that the money raised would go to homeless services as well as transit improvements. This actually involved two different proposals: Proposition K, which would raise taxes in the city by 0.75% to a total of 9.25%, and Proposition J, which would require that $50 million per year from those sales tax funds go to homeless services and $101.6 million per year to be spent on transportation. 65% of voters rejected the sales tax increase. A “kill switch” provision for Prop J allows the mayor to nullify one or both funds by Jan. 1 if Prop K doesn't pass.

Georgia

As in California, the sales tax ballot issues in Georgia centered on increasing sales taxes to fund transportation.

• Approved: Fulton County transportation special purpose local option sales tax (TSPLOST). This measure will raise the sales tax by 0.75% for five years beginning April 1, 2017. The tax will raise up to $655 million over five years to widen and repair roads and bridges and add sidewalks in Fulton’s cities and the county’s unincorporated area.

• Approved: Atlanta TSPLOST and MARTA sales tax. The Atlanta TSPLOST will raise sales taxes by 0.4% for five years, starting April 1, 2017, to fund improvements to the BeltLine, streets and sidewalks. Another measure will raise sales taxes by 0.5% to expand the MARTA transit system. The new increase would be on top of an existing 1 percent MARTA sales tax, which will decrease to 0.5% in 2047. Both the old and new MARTA taxes will expire in 2057.

With both the Atlanta transit and MARTA sales taxes approved, Atlanta’s sales tax will rise to 8.9 percent, increasing from tied for 51st highest of major U.S. cities to 14th highest, according to the Tax Foundation. By law, Atlanta can raise its local sales tax no higher than 9%.

North Carolina

Approved: Wake County public transit referendum. This ballot measure will raise the sales tax by 0.5% in order to fund a 10-year, $2.3 billion transit plan that will include a new rapid bus system and commuter rail between Raleigh and Durham. The increase will bring the total Wake County sales tax to 7.75% in the spring of 2017.

Oklahoma

Defeated: Oklahoma Question 779. This measure would have raised the statewide sales tax from 4.5% to 5.5% in order to raise an estimated $550 million for education, including teacher salary increases.

Combined with Oklahoma’s local sales taxes, the increase would have brought the average combined state and local sales tax in Oklahoma to 9.85%, the second highest in the U.S. after Louisiana, according to the Tax Foundation. Opponents questioned the effect the tax would have on the economy and whether funds would be distributed as promised.

Texas

Approved: Arlington baseball stadium measure. This ballot measure will increase the local sales tax by 0.5% to raise $500 million in sales tax revenue to help build a new baseball stadium for the Texas Rangers. The hike will bring Arlington’s total sales tax rate to 8.5%, taking it from the 51^st highest sales tax in the U.S. to the 21^st highest, according to the Tax Foundation.

Virginia

Defeated: Fairfax County meals sales tax. In Fairfax County, a suburb of Washington. DC, with a population of around 1 million, the ballot included a proposed 4% sales tax increase on restaurant meals and prepared food. The increase would have brought the total sales tax on prepared food and beverages to 10%.

Opponents, including the Northern Virginia Chamber of Commerce, argued that the proposed tax was unfair to the restaurant industry and said the increase would be too much on the heels of a $100 million real estate tax increase earlier this year.

Washington

Approved: Washington Proposition 1. This measure affecting King, Pierce, and Snohomish Counties will raise the sales tax by 0.5% to contribute to the ambitious Regional Measure Sound Transit 3 plan, which would expand the region’s light rail network, rapid bus transit and commuter rail. The increase, beginning Jan. 1, 2017, will come on top of an existing Sound Transit 0.9% sales tax and will raise Seattle’s total sales tax to 10.1%, the sixth highest of major cities in the country, according to the Tax Foundation.

Always up to date on the sales tax rate

Sales tax rates change all the time, not just in election years. And it can be easy to miss a change and charge the wrong sales tax rate—which can invite a visit from the state tax auditor. Sales tax automation such as Avalara AvaTax can help. AvaTax is constantly updated and guaranteed to be 100% accurate, so you’ll always charge the right sales tax rate. AvaTax integrates seamlessly into your accounting or e-commerce platform, and special pricing plans make it very affordable for small businesses.