Tax and Budget

For the fiscal year that began in July, Illinois assumed a revenue boost that it and most states have long been waiting to get on the books — tax collections from remote sales. The state’s assumption is $150 million, based on the nine months that those collections can begin after Illinois’ “economic nexus” law takes effect this fall. (Spread over the course of a full fiscal year, the estimate rises to $200 million.)

In the years ahead, this revenue source is expected to be part of budget estimates and collections in every Midwestern state, thanks to the U.S. Supreme Court’s June 21 decision in South Dakota v. Wayfair(unlike Illinois, most states did not include an increase from online sales tax collections in their FY 2019 estimates).

By a vote of 5-4, the justices overturned a 1992 ruling, Quill Corp. v. North Dakota, that had barred states and local governments from requiring vendors with no physical presence in the state to collect sales taxes. In the years since Quill, online transactions skyrocketed, calls among brick-and-mortar businesses for sales-tax fairness intensified, and multiple attempts at congressional action (always an alternative to a new court decision) failed.

“Hooray for South Dakota,” John Hicks, executive director of the National Association of State Budget Officers, said, noting the state’s passage of legislation in 2016 that became the basis for challenging, and eventually overturning, Quill.

States are increasingly pursuing new streams of revenue to effectively operate and minimize debt. Some states have established or are pursuing a “millionaire’s tax” to minimize budget shortfalls and increase state revenue. The tax is primarily an income tax. California, Connecticut, New Jersey and New York have all established a such a tax. Massachusetts chose to not enact their version of the millionaire’s tax. In Arizona, a ballot measure is up for approval. Every state’s tax structure is different, but it boils down to taxing an individual which makes upward of $250,000 or more.

In South Dakota v. Wayfair the Supreme Court ruled that states and local governments can require vendors with no physical presence in the state to collect sales tax. According to the Court, in a 5-4 decision, “economic and virtual contacts” are enough to create a “substantial nexus” with the state allowing the state to require collection.  

In 1967 in National Bellas Hess  v. Department of Revenue of Illinois, the Supreme Court held that per its Commerce Clause jurisprudence, states and local governments cannot require businesses to collect sales tax unless the business has a physical presence in the state.

Twenty-five years later in Quill v. North Dakota (1992), the Supreme Court reaffirmed the physical presence requirement but admitted that “contemporary Commerce Clause jurisprudence might not dictate the same result” as the Court had reached in Bellas Hess.

Minnesota has become the latest state in the Midwest to enact major legislative reforms designed to improve the long-term health of its public retirement system. SF 2620 received unanimous support in the state House and Senate.

“[It] stabilizes pension benefits for 511,000 [Minnesota] workers, retirees and their families,” Gov. Mark Dayton said when he signed the bill in late May.

Before enactment of this legislation, Minnesota faced $16.2 billion in unfunded pension liabilities; the new law puts the state on a path to fully fund its retirement system within 30 years. The state will contribute $27 million in 2019 and $114 million during the next biennium. Under the law, too, public employers and current public workers will pay higher contribution rates. The state also reduced the cost-of-living adjustment for current retirees.

In 2017, because they lacked the authority to require the collection of sales taxes on remote sales, states and local governments lost up to $13 billion. With one Midwestern state leading the way, this legal and fiscal landscape could change soon, depending on how the U.S. Supreme Court rules in South Dakota v. Wayfair.

For now, a 1992 decision, Quill Corp. v. North Dakota, is the law of the land. It says that, minus congressional action, a state can only require businesses with a substantial presence, or nexus, to collect and remit the sales tax. That ruling has affected not only state tax bases, but the competitiveness of Main Street businesses as well — particularly with the rise of electronic commerce (see line graph).

Four years ago, The Council of State Governments, in partnership with the State and Local Legal Center and members of the Big Seven organizations representing state and local governments, filed an amicus brief critiquing Quill, which prompted Justice Anthony Kennedy to ask for a case to overturn the ruling.

In South Dakota v. Wayfair South Dakota is asking the Supreme Court to rule that states and local governments may require retailers with no in-state physical presence to collect sales tax. Doing so will require the Court to overrule Quill v. North Dakota (1992), where it held that states and local governments cannot require a business to collect sales tax unless the business has a physical presence in the state.

Based on oral argument the Court is likely to follow one of three paths. It could keep the physical presence test and not overturn Quill. It could overturn Quill and replace (or add to) the physical presence test an economic nexus test (like the South Dakota law which requires out-of-state vendors to collect tax only if they annually conduct $100,000 worth of business or 200 separate transactions annually in the state). Finally, it could overturn Quill and allow states to require all out-of-state vendors to collect sales tax no matter how much (or little) business they do in a state.

In South Dakota v. Wayfair South Dakota is asking the Supreme Court to overrule precedent and hold that states and local governments may require retailers with no in-state physical presence to collect sales tax. The National Conference of State Legislatures estimated that states lost $23.3 billion in 2012 from being prohibited from collecting sales tax from online and catalog purchases. 

In 1967 in National Bellas Hess  v. Department of Revenue of Illinois, the Supreme Court held that per its Commerce Clause jurisprudence, states and local governments cannot require businesses to collect sales tax unless the business has a physical presence in the state.

Twenty-five years later in Quill v. North Dakota (1992), the Supreme Court reaffirmed the physical presence requirement but admitted that “contemporary Commerce Clause jurisprudence might not dictate the same result” as the Court had reached in Bellas Hess.