US - District of Columbia to Increase Sales Tax
The City Council recently passed the 2025 Budget Act, which changes the budget policy, including raising the sales and use tax rate. This decision came even though Mayor Muriel Bowser was against such a policy, defining it as “unsustainable.” In addition, other changes are included in the Budget Act, such as transitioning the corporate franchise tax to Finnigan-style apportionment.
Impact of the Changes
The sales and use tax rate will rise from 6 percent to 6.5 percent starting October 1, 2025, and will further increase to 7 percent on October 1, 2026.
It is projected that the increase in the sales tax rate will add approximately USD 338 million to local funds over the four-year financial plan, more specifically:
for fiscal year 2025, the projected increase is USD 15.7 million,
for fiscal year 2026, the projected increase is USD 66.7 million,
for fiscal year 2027, the projected increase is USD 128 million,
for fiscal year 2028, the projected increase is USD 128 million.
Effective for tax years beginning after December 31, 2025, a significant change in the tax policy will occur. Corporation franchise taxpayers in a combined group will now be required to aggregate the sales figures of all group members, regardless of their nexus to the District, to determine a single apportionment factor for the group.
This is a departure from the current Joyce method of apportionment, which requires each group member to calculate its apportionment factor separately. The District adopted the single sales factor apportionment method in 2015.
Conclusion
The approval of the FY 2025 Budget Support Act marks a significant shift in the District's tax policy, despite Mayor Muriel Bowser's concerns about its sustainability. Businesses and residents in the District should prepare for higher tax rates and a new approach to corporate tax apportionment. The transition to a Finnigan-style apportionment method will particularly impact corporate groups with members both within and outside the District.
Source: FY 2025 Budget and Financial Plan, KPMG
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