Holiday wish list: U.S. states count on extra online sales tax to boost budget
today Nov 21, 2018
Illinois, the U.S. state with the lowest credit rating on Wall Street, has often been chastised for using gimmicks to balance its budget.
Take, for instance, its overly optimistic assumptions about savings, such as a voluntary pension benefit buyout that retirement systems have yet to actually start.
For fiscal 2019, which began July 1, Illinois is counting on an additional $150 million from expanding the state's sales tax to all internet purchases made by its residents.
It is hardly alone. At least 32 states have passed or are soon expected to pass laws requiring online sellers to collect and remit sales taxes - including about 20 with laws that would cover spending online during the holiday shopping season.
But tax analysts, attorneys and policymakers say these new laws might not give states what they are banking on. States are devising different plans with varying legal and procedural elements - some being rushed out before they are ready - leaving them open to lawsuits from retailers and others.
"We're in a state of tremendous uncertainty about how these laws will proceed," said Andrew Moylan, executive vice president of the National Taxpayers Union Foundation (NTUF).
The rush to cash in stems from a U.S. Supreme Court ruling in June in a case that pitted South Dakota against Wayfair Inc., Newegg Inc. and Overstock.com Inc.. The decision allowed states to expand the collection of sales taxes on goods and services bought online.
At least three other states have already joined Illinois in including this untested source of money in their current fiscal 2019 budgets. On average, Illinois, Michigan and New Jersey - another fiscally troubled state - include $188 million of new remote sales tax revenue in their current budgets, Reuters found. Vermont has included $4.5 million of new revenue in its spending plan.
State and local governments could have gained $8.5 billion to $13.4 billion collectively in 2017 if they had the new taxing authority, the U.S. Government Accountability Office said in November 2017.
But that windfall is proving to be slower and more confusing than expected, with unanswered questions that could leave some states open to litigation over their rushed or unique tax programs.
A MESSY SCENE
In the Wayfair case, the court found that South Dakota's program to collect remote sales taxes did not burden retailers. The ruling negated the previous prevailing standard: that a company must have a physical presence in a state in order for it to be required to collect and remit sales taxes.
South Dakota's program applies to any company with $100,000 in sales or 200 unique transactions in a state to qualify as having an "economic nexus" there. This allows the state to collect sales taxes on internet purchases made by consumers within its borders.
To be sure, some big online retailers, including Amazon and Wayfair, have already been remitting these taxes in some states, even for its third-party sellers.
But different states are adopting different standards and procedures, creating uncertainty across the country about almost every facet of the expanded taxes.
For instance, it is unclear if some states will try to collect retroactively or require online marketplaces like eBay Inc, which provide sellers with a platform, to collect the sales taxes. States are also unsure if they could be sued for accidentally collecting too much sales tax.
An eBay representative did not respond to an email seeking comment.
Another unknowns include: what should states do if online marketplaces such as Amazon.com Inc, Walmart Inc or Etsy Inc use different codes with different tax implications to categorize the same item sold? And is the individual seller or the marketplace liable for lost tax dollars if a product is misclassified at a lower tax rate?
READY TO ROLL?
South Dakota is part of the 23-member Streamlined Sales and Use Tax Agreement, which for years has tried to clarify sales taxes among states. But even within this group, states are at different stages of implementation.
The varying schemes leaves states open to lawsuits, especially if some elements of its program are vastly different from South Dakota's.
"The only certainty in a post-Wayfair world is that there will be a hellscape of litigation across the states for decades," said NTUF's Moylan.
States currently fall into five different categories: 11 that are compliant with provisions in the Wayfair case; 11 more that should "proceed with caution" on their own programs; and 21 that must first make legislative changes to move ahead, according to an analysis from the Tax Foundation, a conservative Washington think tank.
Two more – Louisiana and Colorado – are not compliant at all, and five states do not levy sales taxes.
Chief among problematic states is Louisiana, which currently collects its own sales taxes, as do many of the state's 63 parishes. Its tangled system has 370 different taxing jurisdictions altogether. And while the state does not tax certain goods – including prescription drugs – some parishes do.
The state is trying to create a single entity to serve as collector of remote sales taxes. But even officials there say they expect lawsuits over the scheme.
"We're not a square peg that fits neatly into a square hole," said Louisiana Revenue Secretary Kimberly Robinson, who chairs the state's Sales and Use Tax Commission for Remote Sellers.
On the opposite end of the spectrum is Florida, which has not yet done anything substantive to expand - even though it should arguably be first in line because it has no income tax and is therefore more dependent on sales taxes than other states, according to the Tax Foundation.
"Legislators said it looks too much like a tax increase," said Kurt Wenner, a vice president of research at Florida TaxWatch, which has advocated for expanding remote sales taxes for the increased revenue.
Congress could potentially provide a solution. A bill announced on September 14 by U.S.
Representative Jim Sensenbrenner, a Wisconsin Republican, seeks to clarify interstate collection requirements. It would block states from imposing sales tax collections on retailers before January 1 and would also bar retroactive taxation.
Over many years, however, Congress has not acted on this issue. So for the time being, states are likely left to their own devices.
© Thomson Reuters 2020 All rights reserved.