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States Adapt Tax Laws as Online Sales Surge

Revenue from tax on web retailers has been a boon to state budgets and government services.

By Eric Syverson and Brian Wanko  |  April 16, 2024

The U.S. Supreme Court decision that gave states the power to collect sales tax from online retailers has had a huge impact on state revenues and government services.

In 2021, 33 states reported $23 billion in remote sales tax revenue, enabling increased investments in education, infrastructure and other government services, thanks to the monumental case known as Wayfair v. South Dakota. The 2018 decision allowed states to collect sales tax from online sales even if the seller lacked a physical presence in the state.

Retail e-commerce sales are estimated to grow to $8 trillion by 2027.

After the decision, states swiftly acted to enforce tax collection on remote sales by defining an “economic nexus,” a state’s threshold for total revenue or number of transactions. Once a remote seller passes the threshold, it is legally obligated to collect and remit sales and use tax in that state. Additionally, states enacted laws requiring marketplace facilitators—businesses that own a marketplace enabling the sale of third-party goods and services—to collect taxes on behalf of third-party sellers, relieving the sellers of that responsibility. Since 2018, all states imposing sales and use taxes have introduced their own laws, leading to discrepancies and complexities that pose challenges for tax collection and taxpayers.

Although some revenue is lost due to compliance obligations that hamper tax remittances, it is harder for states to measure. Some provisions have increased the administrative burden on smaller retailers who must track and comply with differing laws across states and localities. Moreover, some requirements may be outdated and fail to reflect the growth of online retail. Many analysts and tax professionals argue that states’ ability to capture this lost revenue would confer even greater revenues and allow further investments in turn.

The National Conference of State Legislatures’ State and Local Taxation Task Force, which continually examines policy related to economic nexus and marketplace facilitators, has updated the report “State and Local Tax Considerations for Marketplace Facilitator Tax Collection,” providing a fresh look at economic nexus thresholds and collection responsibility, along with state guidance on taxability and double tax relief, among other topics.

The updated report comes as retail e-commerce sales increased from $2.98 trillion in 2018 to $5.3 trillion in 2022 and are estimated to grow to $8 trillion in 2027, with 59% of 2027 sales coming from third-party marketplaces. State leaders recognize that as online markets change, state tax policy and compliance mechanisms also need to evolve. By keeping pace, states can ensure a fair and efficient tax system that supports economic growth and innovation for years to come.

Eric Syverson and Brian Wanko staff NCSL’s State and Local Taxation Task Force, which analyzes emerging tax issues and provides guidance to state legislators on the complexities of the 21st century economy. The task force consists of legislators, legislative staff and NCSL Foundation members. Read the updated report.

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