WASHINGTON – South Dakota, Florida, Nevada, Texas, Washington and Tennessee are the six states with the most at stake as the Supreme Court hears oral arguments on Tuesday in South Dakota v. Wayfair, Inc., the case involving e-commerce sales taxes.
That’s because these states' sales taxes accounted for more than half of their governmental tax revenue in 2015, according to a report by Fitch Ratings.
Overall there are 20 states where at least one third of their revenue is derived from sales taxes, said the report, highlighting how the expected June ruling will have bigger stakes in some states than others.
A ruling in favor of the states “could gradually improve long-term revenue growth prospects,” Fitch said.
The Supreme Court is considering whether to overturn its 1992 ruling in Quill Corp. v. North Dakota that upheld earlier rulings limiting states and localities to collecting sales taxes from only those retailers with a physical presence in their jurisdictions.
South Dakota, which has no state income tax, is appealing a state court ruling in favor of e-commerce retailers Wayfair, Overstock and Newegg. The state court invalidated a 2016 state law requiring e-commerce retailers to collect sales taxes on behalf of the state if they had more than 200 transactions annually or $100,000 in sales.
State and local governments around the nation have been united in backing South Dakota’s effort to overturn Quill.
Other states with the highest dependency on sales tax revenue, according to Fitch, are Hawaii (46.1%), Arizona (45.9%), Mississippi (43.3%), Ohio (42.1%) and Indiana (41.8%).
In dollar terms, the state to gain the most from a court ruling overturning Quill would be California, which could receive $1.7 billion in additional revenue, according to a U.S. Government Accountability Office report released in December.
In some states, sale tax revenue is a much more significant revenue source at the local level than at the state level.
Sales taxes in 2015 accounted for 47.7% of local tax revenue in Louisiana, 46.5% in Arkansas, 41.1% in Oklahoma, 38% in Alabama, 37.2% in New Mexico and 30.8% in Colorado.
Although Alaska does not have a state sales tax, there are 107 jurisdictions in the state that levy sales taxes, including the city of Juneau. In those 107 jurisdictions sales taxes represented an average of 13.4% of their tax revenue in 2015.
“In several states, recent sales tax agreements with major internet retailers have not fully addressed local sales taxes, resulting in continued revenue losses for local governments,” the Fitch report said. “State and local interests could also diverge where the pass-through of sales tax revenues is subject to state discretion. A court ruling in South Dakota's favor would improve local government prospects for collecting internet sales taxes, but new state legislation may be required to fully address these issues in some cases.”
The ruling won’t have a direct impact in five other states -- Alaska, Delaware, Montana, New Hampshire and Oregon – because they have no statewide sales tax.
In four other states where the case is expected to have less impact, sales tax revenue accounts for less than 20% of their overall tax revenue – Vermont (12%), New York (16.8%), Virginia (18.5%) and the District of Columbia (18.5%).