Led by South Dakota, states worked together for new sales-tax authority
|Wednesday, August 15, 2018 at 11:59 AM
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.
He and Lisa Soronen, executive director of the State and Local Legal Center, were featured speakers in July at a session on fiscal issues held during the Midwestern Legislative Conference Annual Meeting. As Hicks and Soronen explained during separate presentations, the 2016 South Dakota law requires most retailers without a physical presence in the state to remit the state’s sales tax. It applies to sellers with 200 or more annual transactions in South Dakota or whose gross revenue from sales in the state exceeds $100,000.
When legislators passed that law two years ago, Soronen said, “Its entire purpose was not to collect a dime worth of taxes” — at least in the immediate future. Rather, “it was simply to get a case before the Supreme Court.”
Republican- and Democratic-led states across the country subsequently backed South Dakota’s legal push.
“It is absolutely unbelievable to have 41 states file amicus briefs asking the Supreme Court to do anything,” said Soronen, whose center also files briefs (including in the Wayfair case) based on input from The Council of State Governments and the other “Big Seven” organizations that represent state and local elected and appointed officials.
While the Wayfair decision is undoubtedly a victory for states, she cautioned state policymakers that the justices did not uniformly bless any kind of state mechanism for taxing remote sales from out-of-state vendors.
Rather, Wayfair spoke specifically to the constitutionality of South Dakota’s actions.
For example, the state provides a safe harbor for small businesses or those with limited commerce activity in South Dakota, via the “nexus” thresholds of $100,000 and 200 transactions. In addition, the law doesn’t seek to collect taxes retroactively, and South Dakota is a member of the Streamlined Sales and Use Tax Agreement — a multistate effort to create a simpler, more uniform system of sales tax collection.
All states should now examine their existing laws on online sales tax collections, Soronen said.
In the Midwest, every state except Illinois is part of the Streamlined Sales and Use Tax Agreement. Most states in the region, too, have some kind of economic nexus law in place; many have duplicated South Dakota’s $100,000 threshold in their own statutes.
“That might not be the right number for every state, depending on the size of your economy,” Soronen cautioned. “Take California, for example, which has the 12th-largest economy in the world. I wouldn’t even consider the same threshold [of $100,000] as South Dakota’s.”
|Stateline Midwest: August 2018||2.62 MB|