Amid the global economic slowdown resulting from COVID-19, governments at all levels are scrambling to compensate for lower tax revenues, creating uncertainty among hard-hit businesses about the future tax bite they need to plan for.

Vertex, whose tax software and services are tightly integrated with Oracle’s cloud-based finance applications, is stepping up to help its more than 4,000 customers in over 130 countries meet that challenge. To help you understand the scope of the fiscal problem, we interviewed Mike Bernard, Vertex’s chief tax officer, and consulted some fresh market research.

Consider that tax revenues for US state governments alone are expected to decline about $615 billion this year and next year compared with 2019, according to a June 15 report by the Center on Budget and Policy Priorities. That shortfall would exceed those in the 2001 and 2008 recessions.

While US consumers and small businesses had until July 15 to file their income tax returns for calendar 2019, extended from the usual April 15 deadline, that extension doesn’t help companies that need to file on a monthly tax schedule, Bernard notes.

Governments worldwide already are adjusting their tax rates, but even more changes are expected this fall, when local, state, and national authorities take into account shortfalls in their Q1 and Q2 revenues. “There will be a flurry of legislative activity,” Bernard says.

Companies with their own government affairs groups already are engaging with legislatures and their tax writing committees, which must factor in which sectors have managed to thrive through the pandemic—and which have been hit hardest.

The US landscape

In the US, most state and local governments collect revenue from sales taxes, income taxes, and property taxes. In the current recession, sales tax revenues are lower because most consumers slashed their discretionary spending, focusing on food, medicine, and other staples (though consumer spending rebounded in May). Most of these staples aren’t subject to sales tax.

Since the pandemic began, sales tax rates at the local level have changed faster than they have in more than a decade. As of June 3, there have been 150 city sales tax rate changes to date since the beginning of the year. Of those 150, 140 were rate increases and 10 were decreases, while 35 new city taxes and 88 new district taxes went on the books.

 

“You don’t want tax calculations or tax processing as an educated guess.”

Harsh Takle, Vice President of Financials Development, Oracle

Nashville is increasing property taxes by 34% in what Mayor John Cooper calls a “painful but necessary” step to raise money for the city to offset losses during the pandemic. Tax increases are also under consideration in California, Chicago, Dallas, New York, Seattle, and New Jersey.

The second major source of US tax revenue, income taxes, is lower due to rising unemployment, salary cuts, and furloughs. As for property taxes, governments will likely see lost revenue as homeowners and businesses alike challenge valuations, Bernard says. “All three of those things are going to have to be rebalanced,” says Bernard, who expects governments to increase income tax rates and remove certain exemptions.

Governments may also introduce new sales taxes, especially for services. The reasoning? “If you can afford to hire someone to mow your lawn, clean your clothes, clean your house, or do things like that, then you are able to pay the tax associated with that,” he says.

Likewise, companies could see taxes for the first time on accounting, legal, engineering, IT, architecture, and information services, Bernard says.

Governments in states reliant on two industries in particular are likely to see the biggest tax revenue declines: travel and hospitality, including restaurants, hotels, and conference centers; and the energy sector. Those states include Florida, Texas, Hawaii, Nevada, and Alaska, Bernard says.

Current crisis has precedent

Tax revenues swung wildly in the 10 years following 2006, when the US saw a big stock market downturn and experienced significant weather damages, particularly hurricanes, affecting the hospitality and oil sectors. States with diverse economies did better in this period, Bernard notes.

The US alone has a staggering 70,000 jurisdictions that change their tax laws and regulations constantly.

Even in normal circumstances, complying with taxes across regions and countries is complex and costly, says Harsh Takle, Oracle VP of financials development. The US alone has a staggering 70,000 jurisdictions that change their tax laws and regulations constantly. Enterprises that cross jurisdictional lines, such as manufacturers, shippers, and charities, are particularly challenged, Takle says.

Other countries, such as Canada and those in Europe, have fewer tax jurisdictions but have their own complications. Canada taxes at the province level; it has 10 provinces. And Europe levies taxes nationally. In those countries, complexity comes from cross-border transactions. Additionally, businesses in those countries need to comply with local self-assessment taxes; even if the supplier doesn’t levy taxes on a business customer, the customer needs to self-assess and report to the local tax authority.

In Brazil and India, states can claim a share of federal tax and then offer tax reclamation policies for spending in specific areas, such as R&D. Other countries’ national and local tax policies change rapidly, making it hard for businesses to keep up.

It’s why so many businesses rely on software and services companies such as Vertex and Oracle for guidance. Says Oracle’s Takle: “You don’t want tax calculations or tax processing as an educated guess.”

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Illustration: Oracle