Question

What are two potential issues that may occur when there is a significant difference

Answer 1

Two potential issues might arise when there is a significant difference between the sales tax rates between two jurisdictions or cities.

First, consumers might try to avoid the taxes of one jurisdiction by shopping in a neighbouring one. This is called sales tax avoidance. In this case, consumers leave high-tax areas and make major purchases in low-tax areas.

The other potential issue is that businesses might also try to avoid such taxes.  Businesses might sometimes locate just outside the border of a high sales tax area in order to avoid being subjected to these rates. In both of these situations, implementing a high sales tax rate can backfire, making it more difficult for the jurisdiction to collect revenue.