By Jackson Brainerd
The two-year anniversary of the U.S. Supreme Court’s momentous (in the state tax policy world) South Dakota v. Wayfair decision came and went over the weekend.
Centered around legislation developed by NCSL’s Task Force on State and Local Taxation and introduced by then-NCSL President, Senator Deb Peters (R) in South Dakota, the ruling eliminated the requirement that businesses must have a physical presence in a state to have sales tax collection responsibilities.
At long last, states had the authority to collect taxes on internet sales made by remote retailers and state tax bases could better reflect the 21st-century economy and growing e-commerce sector.
States were quick to pass laws that allowed them to tap into this new revenue source. Forty-three of the 45 states that impose sales taxes have now adopted “economic nexus” laws, which require remote retailers who exceed a certain volume of sales into a state to collect and remit sales taxes.
Forty-one states have passed marketplace facilitator laws, which require businesses that facilitate sales for third-party sellers (e.g. Amazon or eBay) to collect taxes on those sales, shifting the responsibility away from the smaller sellers that use their platform. NCSL’s 2019 state tax actions survey showed that many states were expecting these measures would bring in tens to hundreds of millions of dollars in new sales tax revenue in fiscal years 2020 and 2021. (More details on the Wayfair decision and state implementation of economic nexus and marketplace facilitator laws, can be found here.)
The speed with which states moved to adopt these provisions prompted concern from some in the business community and Congress. Many businesses suddenly faced new, varying collection requirements and, in some cases, have had to navigate unclear guidance or statutory language.
As with any new area of tax policy, there are still wrinkles that need to be ironed out, especially when it comes to helping smaller businesses come into compliance. In retrospect, however, states’ haste to adopt economic nexus and marketplace facilitator laws has undoubtedly provided a desperately needed cushion for falling tax revenues.
With millions of lost jobs and physical retail locations forced to close their doors, sales taxes (and virtually all other tax categories) have plummeted. The Tax Policy Center reported that “April collections, mostly reflecting March sales, fell 16% in the 42 states for which we have complete data.” This is a significant issue, as sales taxes account for 30.8% of total state tax collections on average. New York sales tax revenues dropped by 24% in April compared to a year earlier. Texas sales tax revenues were down 13.2% in May year-over-year, the largest decline in a decade.
One silver-lining is that online sales, which made up 16% of national retail sales in 2019, have spiked. In the U.S., online sales were up 77% in May, year over year. While not enough to prevent negative sales tax growth overall, the tax revenue on these purchases provides a degree of stability to state finances at a critical time and will continue to be helpful once they enter a recovery phase.
The need will be significant. Moody’s Analytics has estimated that the current recession will cost states up to $500 billion through fiscal year 2022. (For context, states were estimated to have lost $283 billion during the Great Recession.)
The current economic conditions are not easy for businesses, either, and some are still struggling with new online sales tax requirements. Leading up to the spread of the pandemic and subsequent economic fallout, there were calls for Congress to preempt state tax authority and establish certain uniform, national standards.
At this point, relying on the slow, heavy hand of Congress to resolve a new, constantly-evolving and nuanced area of state tax policy could easily create more issues than it resolves. It could also risk further damaging state finances, which are in such a precarious position that economists are predicting an economic depression absent adequate federal aid.
States, which have in many respects led the national response to the coronavirus pandemic, should be left to figure out lingering internet sales tax issues as well.
Jackson Brainerd is a Senior Policy Specialist with the NCSL’s Fiscal Affairs Program.