On June 21, 2018, the U.S. Supreme Court ruled that internet retailers can be required to collect online sales tax, even in states where they have no physical presence. The landmark decision, South Dakota vs. Wayfair, Inc., reverses a 1992 ruling and can result in a greater revenue source for state and local governments. As explained in this free Avenu webinar held right after the ruling, there are still uncertainties that need to be worked out. Below are highlights from the presentation that inform local government leadership about online sales tax, its revenue potential and what must or may happen before those funds are realized.
It’s been estimated that state and local governments lose nearly $13 billion per year.
Consumers are increasingly choosing the convenience and savings of online shopping. However, if those purchases were made at brick and mortar stores, the sales tax revenue that governments would collect amounts to as much as $13 billion according to the federal General Accountability Office. Having an online sales tax will allow states, cities and counties to collect this money. All governments struggle with pension, operational and other costs, and raising taxes is not an easy option. This makes online sales tax a sound choice under the right circumstances; retroactive tax collection is not permitted.
The ruling includes protections for small online businesses.
The court specified that its ruling was applicable to businesses with more than $100,000 in sales or more than 200 unique transactions per year. This may provide some relief to small, independent online retailers that will have a more difficult time adjusting to a new tax code.
Congressional Action/Implementation Moratorium.
Some stakeholders are advocating for Congress to create a six-month moratorium on sales tax collection to help businesses comply with different state statutes. Therefore, a like outcome is that some states will need to modify their current legislation to comply with the decision. If states enact laws perceived as limiting interstate commerce, then there is a strong chance that Congress will draft a federal standard. There is no timeline for this to happen.
Implementation and Timing.
Several states are issuing guidelines and implementing these new rules, so this will take time. It is still possible that there will be appeals in the lower courts for specific areas of compliance. Localities need to stay vigilant and proactive to ensure they are receiving the revenue they are entitled to.
To keep providing critical services, cities and counties must recoup losses and collect new sales tax revenue from purchases made online. That was one of the key messages Avenu Senior Vice President Doug Jensen presented last month to the Municipal Fiscal Advisory Committee for the City of San Francisco, a community that’s home to many online and traditional brick and mortar retailers.
“Brick and mortar retail sales are rapidly eroding while online sales are growing,” says Jensen. “Municipalities cannot rely on the growth they expected because much of it is from online purchases distributed through pools or not collected at all. It is hurting the cities and counties that rely on this revenue to keep essential services up and running.”
“Cities and counties are still owed the sales and use taxes from online purchases,” continues Jensen. “Collecting that revenue has become a necessary burden that municipal leaders have to take on to get the revenue they need to ensure their communities are livable.”
Avenu joins many municipalities in supporting marketplace fairness legislation to hold online retailers accountable. Through bills like U.S. Senate Bill 976, online retailers in participating states would be required to collect and remit sales and use taxes. The company also awaits a critical U.S. Supreme Court decision this June that may lead to greater marketplace fairness and the requirement that all online retailers start collecting applicable sales taxes regardless of their physical presence.
“Our goal is to ensure all businesses have prosperous and thriving communities to do business in,” advocates Jensen.