This Reuters report says U.S. states moved quickly after the Supreme Court’s June ruling in the South Dakota v. Wayfair Inc. case, but many are now finding that the promised online sales tax money may be harder to collect than expected.
Illinois, which Reuters described as the state with the lowest credit rating on Wall Street, had already built $150 million in remote sales tax revenue into its fiscal 2019 plan, which began on July 1. The state was among several that were counting on money from internet purchases even though the legal and administrative details were still unsettled.
At least 32 states had passed, or were expected soon to pass, laws requiring online sellers to collect and remit sales taxes. About 20 of those laws were expected to cover holiday-season online spending. Reuters found that Illinois, Michigan and New Jersey were each budgeting an average of $188 million in new remote sales tax revenue, while Vermont had included $4.5 million.
The June Supreme Court decision changed the old rule that a business needed a physical presence in a state before being forced to collect sales tax there. In the Wayfair case, the court upheld South Dakota’s system, which applies to companies with $100,000 in sales or 200 unique transactions in the state. That standard allowed South Dakota to treat a seller as having an “economic nexus” there.
Even so, the rollout across the country was uneven. Tax analysts, attorneys and policymakers warned that states were adopting different standards and procedures, sometimes before the rules were fully ready. Andrew Moylan, executive vice president of the National Taxpayers Union Foundation, said: “We’re in a state of tremendous uncertainty about how these laws will proceed,”
One concern was whether states would try to collect taxes retroactively, or require online marketplaces such as eBay Inc, Amazon.com Inc, Walmart Inc and Etsy Inc to do the collecting. Another question was who would be liable if an item was misclassified and taxed at the wrong rate, or if a state accidentally collected too much tax and faced a lawsuit.
Some large retailers, including Amazon and Wayfair, were already remitting these taxes in some states, including for third-party sellers. But the broader system remained fragmented. South Dakota belonged to the 23-member Streamlined Sales and Use Tax Agreement, which has long tried to simplify the issue, yet even member states were at different stages of implementation.
Reuters said the uncertainty left states exposed to litigation, especially where local programs differed sharply from South Dakota’s model. Moylan warned that “the only certainty in a post-Wayfair world is that there will be a hellscape of litigation across the states for decades,”
The Tax Foundation, a conservative Washington think tank, placed states into five categories: 11 were compliant with the Wayfair framework, 11 more should “proceed with caution,” and 21 would need legislative changes before moving ahead. Louisiana and Colorado were not compliant, while five states did not levy sales taxes at all.
Louisiana was singled out as especially complicated because its tax system includes 63 parishes and 370 taxing jurisdictions. The state was trying to create a single collector for remote sales taxes, but Revenue Secretary Kimberly Robinson, who chairs the state’s Sales and Use Tax Commission for Remote Sellers, said: “We’re not a square peg that fits neatly into a square hole,”
Florida, by contrast, had not taken substantive action, despite being heavily dependent on sales taxes because it has no income tax. Kurt Wenner of Florida TaxWatch said: “Legislators said it looks too much like a tax increase,”
Congress was also considering whether to step in. On September 14, U.S. Representative Jim Sensenbrenner, a Wisconsin Republican, announced a bill that would clarify interstate collection rules, block states from imposing sales tax collection requirements before January 1, and bar retroactive taxation. But after years of inaction in Congress, Reuters said states were likely to remain on their own for the time being.
Reuters also noted that state and local governments could have gained between $8.5 billion and $13.4 billion in 2017 if they had already possessed the new taxing authority, according to a U.S. Government Accountability Office estimate released in November 2017.
The report also referenced a 2014 Reuters file photo from the New York Stock Exchange in New York, showing traders waiting for the Wayfair IPO on October 2, 2014.
