Tax bracket or straightjacket?

Tax bracket or straightjacket?

Over the course of my career, I’ve examined a variety of anomalies, curiosities, and complexities that plague the sales and use tax system in the United States. None of them frustrate me more than the bracket tax concept.

The bracket tax system is used by both Maryland and Florida. In these states, rather than simply calculating the taxable amount of a purchase by multiplying the applicable sales tax rate, sales tax rates are based upon a table: The amount of a taxable sale is cross-referenced with the associated sales tax due for that range (or bracket). Both Florida and Maryland provide an extensive assortment of sales tax cards to help merchants manually look up the appropriate sales tax amount for every transaction.

The system dates back to a time when state-of-the-art cash registers could use simple addition and subtraction routines but couldn’t multiply. Accordingly, merchants were provided sales tax tables that identified a dizzying amount of possible sales permutations and the corresponding sales tax value (pre-calculated). The cashier merely:

  • Arrived at the pre-tax sales total
  • Grabbed the trusty tax chart
  • Found that amount’s bracket on the chart
  • Obtained the required sales tax
  • Punched the sales tax amount into the cash register
  • Pressed the tax key on the machine to arrive at the total amount due from the customer.

A fantastic solution … 40 years ago

These days, the Florida Department of Revenue explains: “Florida uses a bracket system for calculating sales tax when the transactions fall below or in between whole dollar amounts. Multiply the whole dollar amount by the tax rate (6% plus the county discretionary sales surtax rate) and use the bracket system to figure the tax on amounts less than a dollar.”

Math must be too hard when those pesky decimals come into play.

To make matters worse, Maryland doesn’t consistently apply its bracket system for all of its statutory sales taxes. Maryland imposed a 9 percent sales and use tax rate on the sale of alcoholic beverages, but it doesn’t require alcohol vendors to use the antiquated bracket system to calculate the tax.

Welcome to the 21st century

One would think every taxing jurisdiction would do everything in its power to simplify a merchant’s calculation and collection of sales tax. After all, even the simplest cash register these days is equipped to perform simple multiplication tasks and round the amount for inclusion in the checkout process. Forcing an arcane bracket system on merchants provides no value to the taxing authority, and it unnecessarily complicates what should be a simple calculation. 

Yet, sales tax brackets persist. And unfortunately, more and more vendors are likely to encounter them. On June 21, 2018, the Supreme Court of the United States granted states the authority to tax remote sales when they overruled a physical presence rule (South Dakota v. Wayfair, Inc.). Maryland is one of many states now requiring remote vendors to collect and remit sales tax.

Sales tax automation is a simple solution for this type of sales tax complexity, and more businesses will likely embrace it as more states impose a sales tax collection obligation on them. However, even sales tax automation systems must build in specialized logic to accommodate the bracket tax requirement.

Straightjacket?

I included straightjacket in the title for two reasons:

First, the bracket tax system binds the arms of merchants simply attempting to provide a sales tax amount to customers.

Second, the more I allow myself to ruminate on how this system adds unneeded complexity to sales tax calculation (and part of my job is to deliver automated sales tax solutions that simplify the process), the more I need a straightjacket myself. I want my colleagues to stay safe when we discuss bracket tax!

For the complete list of states with remote seller sales tax laws, check out Avalara’s South Dakota v. Wayfair, Inc. resource page.

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