It’s been three years since the U.S. Supreme Court handed down a decision that electrified the state tax policy world: South Dakota v. Wayfair.
The ruling—centered on legislation developed by NCSL’s Task Force on State and Local Taxation and introduced by NCSL’s then president, South Dakota Senator Deb Peters (R)—eliminated the requirement that businesses have a physical presence in a state to collect sales tax.
It gave states the authority to collect taxes on internet sales made by remote retailers, meaning state tax bases could better reflect the growing e-commerce sector. Many states expected these measures to bring in hundreds of millions of dollars in new revenue in fiscal years 2020 and 2021, according to NCSL’s state tax actions survey of legislative fiscal offices.
Of the 45 states that impose sales taxes, all have now enacted economic nexus and marketplace facilitator laws.
States were quick to pass laws allowing them to tap into this new revenue source. Like South Dakota, whose law was approved by the Supreme Court, states adopted “economic nexus” laws to require remote retailers exceeding a certain volume of sales to collect and remit sales taxes. They also passed “marketplace facilitator” laws, which require businesses that facilitate sales for third-party sellers to collect taxes on those sales, shifting the responsibility away from the smaller sellers using their platforms.
Of the 45 states that impose sales taxes, all have now enacted economic nexus and marketplace facilitator laws. (The most recent was Missouri, where Governor Michael Parson (R) signed legislation in June to join the club.)
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, wrinkles are still being ironed out, especially when it comes to helping smaller businesses comply. In retrospect, however, states’ quick adoption of the new laws provided a much-needed cushion against falling tax revenues when the pandemic brought most economic activity to a standstill.
With millions of lost jobs and physical retail locations forced to close their doors, collections of sales (and most other) taxes plummeted. In the second quarter of 2020, collections declined 13.2% compared with the year earlier, according to the Tax Policy Center. This was significant, as sales taxes account for 30.8% of total state tax collections on average.
But as retailers’ physical doors closed, another one opened: Online sales soared, up 77% in May 2020, year over year. While not enough to prevent negative sales tax growth overall, the tax revenue on these purchases gave a degree of stability to state finances at a critical time. Eric Kim, head of the state rating team at Fitch Ratings, told Bloomberg Businessweek that the Wayfair decision “could not have come at a better time” for states and local governments. By the end of the year, ecommerce made up 21.3% of total retail sales, up from 15.8% in 2019.
As states regain fiscal health, online sales taxes have surely helped. Most states do not separate retail and online sales tax collections in their reporting, but legislative fiscal offices have reported that collections are performing better than expected since the start of the pandemic, and at least 25 states reported to NCSL that they had revised their estimates for FY 2021 sales tax collections upward. Florida, an internet sales tax holdout, adopted a law in April to require remote retailers to remit the tax, and the state plans to use the revenue (estimated to be $973.6 million in 2022) to replenish its unemployment insurance trust fund.
The nationwide effort to modernize remote-sales taxation continues. With marketplace facilitator laws in place, many states are now looking to require such platforms to collect other fees as well. Virginia, for example, now requires car-sharing platforms meeting the definition of marketplace facilitator to collect excise tax, while North Carolina requires marketplaces that facilitate food-delivery services to collect local meals taxes. Vermont will require marketplace facilitators to collect the universal service charge on wireless telecommunications and prepaid wireless card sales. Efforts like these, while not always popular, are intended to help state tax bases keep pace with evolving consumer markets.
Jackson Brainerd is a senior policy specialist with NCSL’s Fiscal Affairs Program. This story first appeared in the Summer 2021 print edition of State Legislatures magazine.