E-commerce helping drive sales tax revenue upward

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WASHINGTON — Revenue from sales and use taxes increased by $847.1 million in 2018, the largest net change of any tax category in 2018, according to the National Conference of State Legislatures.

“Midway through fiscal year 2019, general sales tax collections were exceeding expectations in 17 states and on target in another 14,” according to NCLS.

Moody’s Investors Service noted that 87.8% of sales tax growth in Michigan is forecast to come from remote retailers.

“Nearly all states with sales taxes and legislation that enables taxation of remote retailers have indicated a positive impact from new remote sales tax revenue in fiscal 2020, with such revenue ranging from 0.2% of forecast sales tax collections to 2.7%,” Moody’s said in a report issued March 18.

Last June the Supreme Court upheld South Dakota’s 2017 law requiring sales tax collection if a retailer has at least 200 transactions or $100,000 in sales in the state over a calendar year, overturning the previous standard that required a retailer to have a physical presence in the state.

South Dakota’s state law was determined to have met several requirements for not placing an undue burden on interstate commerce, including the state’s adoption of streamlined sales tax rules and the existence of only one statewide sales tax.

The long-awaited high court decision has been positive for state and local government budgets, but not as much a boost as some of the estimates had predicted.

Colorado expects more than 60% of fiscal 2020 sales tax growth to come from out-of-state retailers, Moody’s found.

Joshua Grundleger, an analyst at Moody’s who was primary author of the report, said in an interview Friday he expects small rural states will most likely be the biggest beneficiaries of last year’s Supreme Court ruling.

But Grundleger noted that only 10 or 11 states provided separate e-commerce sales tax revenue in their new budget documents.

David Hitchcock, S&P Global senior director for the U.S. states group, said many states have incorporated online sales tax revenue into the same budget line that includes other efforts to broaden the tax base through taxation of services.

“There’s a very robust discussion going on right now in Utah where the governor has proposed lowering the sales tax rate but broadening what’s taxed, so you’d include Uber rides and maybe a haircut,” Hitchcock said. “Realtors and attorneys don’t necessarily like the idea of taxing services.”

The Utah legislature has postponed a decision until the summer.

“All the states that I cover, if they have a sales tax, are trying to conform and get a little extra money,” Hitchcock said.

E-commerce sales grew 12.1% in the fourth quarter of 2018 compared to the same October through December period of 2017, the U.S. Commerce Department reported earlier this month. E-commerce accounted for 9.9% of all sales in the fourth quarter and its share of all sales continues to grow.

John Hicks, executive director of the National Association of State Budget Officers, said he found the new Moody’s report to be “pretty spot on” in its characterization of the impact on state budgets.

Among the states that have broken out their e-commerce sales tax revenue, Hicks said the increase has generally been about 2% on an annual basis, which would translate to about $5 billion nationally among the 45 states that impose sales taxes.

“It doesn’t blow the walls off but in some states it’s a decent portion of their increase in sales tax revenue,” Hicks said. “This is a base broadening effort first, meaning to be able to capture the sales tax already due and owing on consumption.”

“Another point that isn’t in the Moody’s report that I think is notable, is that a growing number of states are passing laws that require marketplace facilitators to collect and remit sales tax,” Hicks added, citing e-commerce sites such as Amazon, Esty, Wayfair and eBay that act on behalf of mom-and-pop sellers.

“More states are moving in that direction to improve the collectibility of sales tax and it also creates administrative ease for the small retailer out there who has to contend with all these different jurisdictions,” he said.

States also have made other changes related to the 2017 Tax Cuts and Jobs Act, according to NCLS.

“Stemming from tax changes made last year, sales and use tax revenues increased the most in Louisiana, Kentucky and Illinois,” NCLS said. “Louisiana’s major increase was a result of extending the state’s temporary sales tax, though at a reduced rate. Kentucky’s and Illinois’ gains derived from sales tax collections on internet purchases.”

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E-Commerce Online sales tax Sales tax State budgets State and local finance Moody's S&P Washington DC
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