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Questions abound about how online retail sales tax policies will play out following a landmark Supreme Court decision.
WASHINGTON — For many state and local governments that depend heavily on sales tax revenues, the U.S. Supreme Court decision last week giving states greater leeway to collect taxes on retail sales made by out-of-state online vendors was a welcome development.
But the court ruling in South Dakota v. Wayfair, Inc. has also left complicated questions in its wake. Like what the specifics of new state policies could look like, whether Congress will take action, and how companies that sell goods online will react.
“Now comes the interesting part,” Kim Rueben, director of the State and Local Finance Initiative at the Urban-Brookings Tax Policy Center, said at an event on Tuesday.
The court decision overturned the so-called “physical presence” standard, a precedent established under two prior rulings by the court. It had blocked states from imposing sales taxes on retailers without an in-state “physical presence,” like real estate or employees.
Justice Anthony Kennedy’s opinion in Wayfair appears to endorse elements of the South Dakota sales tax law that led to the case, offering a checklist of sorts for states considering legislation.
Some of these elements include a “safe harbor” to shield businesses with minimal online business in a state from sales taxes, not applying the taxes retroactively to past transactions, and tax administration that is centralized, rather than fragmented across localities.
It’s still possible that a court could strike down a state sales tax law targeting online retailers, if it’s determined that the law imposes too heavy a burden on interstate commerce.
Max Behlke, budget and tax director for the National Conference of State Legislatures, was among the other experts who appeared at the event where Rueben spoke.
He said that for the last several months the Conference of State Legislatures, the National Governors Association and the Federation of Tax Administrators have been meeting regularly to discuss what would come next if the court ruled in the way that it did.
“We don’t want to prove the people that have been saying for years this will be chaos,” he said.
One of the common arguments against allowing states to collect sales taxes from out-of-state vendors is that it could lead to a situation where companies are forced to comply with unwieldy tax obligations in thousands of taxing jurisdictions across the U.S.
Behlke said he’s been encouraging states to take steps like steering clear from attempts at retroactive taxation, and making tax payment registration processes straightforward. “How do you make it as simple as possible for these people that are trying to follow the law," he said.
One key area where there’s some uncertainty has to do with the “de minimis,” or minimum, levels of online retail activity that will be covered by state tax laws. Joe Bishop-Henchman, executive vice president of the Tax Foundation, said he thought de minimis guidelines will “probably be the next big issue of contention.”
The South Dakota statute that spurred the Supreme Court case is written to only apply to vendors with over $100,000 of sales, or 200 separate transactions in the state annually.
“Congress could facilitate the discussion on a national standard that would create a de minimis,” North Dakota Sen. Heidi Heitkamp, a Democrat, said at the event on Tuesday.
(Heitkamp was North Dakota’s tax commissioner during the 1990s when the state went to court in Quill v. North Dakota, the last Supreme Court case to affirm the physical presence standard.)
One aspect of the de minimis debate has to do with whether it makes sense for states to use the same dollar and transaction amount standards when applying online sales taxes, or if these minimums should go up, or down, depending on a state’s size or other factors.
“I am concerned about the moms and pops,” Heitkamp said. “I am concerned about de minimis.”
Behlke stressed that the state tax officials he’s talked to are not eager to crack down on the smallest online retailers.
But Heitkamp predicted that after the Wayfair decision “there’s going to be horror stories about, you know, the grandma with the jelly getting dinged by some revenue department. That always happens.”
“You don’t want those stories,” she added. “You’ve got to be clear on what you think this means in your state.”
Ilyssa Meyer manages public policy and research for Etsy, Inc., a company that provides an online marketplace for people to sell goods. She argues that, even with sophisticated tax software, calculating sales taxes between states and localities can quickly become complicated.
“Software is not a magic bullet,” she said.
Meyer described how marshmallow pops and handmade pecan bars sold by one Etsy user are subject to different sales tax rules.
Other difficulties can arise, she said, when sales are eligible for tax exemptions. A dog collar purchased online might be subject to sales tax, but exempt if it is for a service dog. The same could be true for tee-shirts purchased for a church children’s basketball league, she said.
States and companies are already responding to last week’s court ruling.
For instance, New Jersey is pushing ahead with online sales tax legislation similar to South Dakota's law. And Louisiana lawmakers eyed possible online sales tax revenues amid tax negotiations there in recent days.
Meanwhile, Overstock.com, Inc., which joined Wayfair in challenging the South Dakota tax statute, said Monday it had voluntarily started the process to collect sales tax on purchases made by consumers from the more than 12,000 U.S. tax jurisdictions.
The company is also urging Congress to intervene with legislation. Congress has failed previously in attempts to reach consensus in both the House and Senate on legislation to address online sales tax issues.
Bishop-Henchman said that House lawmakers in March came very close to including legislation known as the Remote Transactions Parity Act in an omnibus spending package. But he said this effort was ultimately derailed, mainly due to lobbying by online retailers.
"The collective goal is to get good tax policy that applies, that levels the playing field for all sellers equally," said Behlke with the National Conference of State Legislatures.
He added that, until that necessitates the need for congressional action, "I just don’t see how states are going to ask Congress to restrict authority that they’ve been asking for for the last 50 years.”
Bill Lucia is a Senior Reporter for Government Executive's Route Fifty and is based in Washington, D.C.