WASHINGTON -- States could gain $8 billion to $33.9 billion in additional annual sales tax revenue as a result of a U.S. Supreme Court ruling Thursday supporting an e-commerce law enacted by South Dakota.
The high court ruled 5-4, to strike down its 1992 physical presence standard set forth in the case, Quill Corp. v. North Dakota, that exempted an out-of-state catalogue retailer from collecting sales tax.
The majority opinion, written by Justice Anthony Kennedy, described the physical presence rule of Quill as "unsound and incorrect."
"The physical presence rule has long been criticized as giving out-of-state sellers an advantage," the ruling said. "Each year, it becomes further removed from economic reality and results in significant revenue losses to the states. These critiques underscore that the rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause."
The four dissenting justices said the issue should be addressed by Congress rather than the court.
“Nothing in today’s decision precludes Congress from continuing to seek a legislative solution,” Chief Justice John Roberts wrote in the dissenting opinion, joined by Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan.
Roberts said the court’s decision “suddenly changing the ground rules” may have “waylaid Congress’s consideration of the issue.”
“Armed with today’s decision, state officials can be expected to redirect their attention from working with Congress on a national solution, to securing new tax revenue from remote retailers,” Roberts wrote.
Moody’s Investors Service issued a statement calling the ruling “credit positive for states and local governments, particularly for states that rely most heavily on sales taxes to support their budgets."
The 1992 ruling involved North Dakota’s effort to collect sales tax on mail order catalogue sales by Quill, an office supplier retailer that did not have any stores or warehouses in the state several years before Amazon made its first Internet sale.
Thursday’s ruling in South Dakota v. Wayfair, Inc., involves a 2016 law enacted by the state requiring out-of-state e-commerce retailers to collect sales tax if they have more than 200 transactions annually or $100,000 in sales within the state. A state court invalidated the law, citing the physical presence standard in the Quill ruling, in favor of e-commerce retailers Wayfair, Overstock and Newegg.
The high court took South Dakota’s appeal because some of the justices agreed it was time to reconsider that earlier standard.
The physical presence standard is “antiquated,” Gregory Matson, executive director of the Multistate Tax Commission, said in a recent interview.
“The states can work on figuring out, like the South Dakota statute, an appropriate threshold,” Matson said, predicting the result of having the physical standard overturned.
The implementation will be gradual with governors consulting with their state legislatures on how to proceed.
“I think we can get down to straightforward consistent tax administration and where you’ve got thresholds set up and what I would say is continued effort at real simplification to make the burdens on interstate commerce as minimal as possible,” Matson said.
For state and local governments the stakes in this case are in the billions of dollars of additional sales tax revenue.
The U.S. Government Accountability Office said in December that state and local governments could have gained an additional $8 billion to $13 billion in sales tax revenue in 2017 if they were given authority to require sales tax collection from all remote sellers. “This is about 2 to 4% of total 2016 state and local government general sales and gross receipts tax revenues,” GAO said.
Other groups have much higher estimates. The National Conference of States Legislatures and the International Council of Shopping Centers estimated states and local governments lost $26 billion in tax revenue in 2015 from online retail sales.
The Marketplace Fairness Coalition of major brick-and-mortar retailers, local chambers of commerce and commercial real estate firms has estimated the lost sales tax revenue will grow to $33.9 billion this year. The coalition’s estimate assumes that e-commerce will continue to grow 15% annually, while the non-ecommerce share of remote sales will only grow 5% annually.
The scope of the problem has narrowed as the number of large online retailers that collect some sales taxes, such as Amazon, has grown.
A court brief filed on behalf of House Judiciary Committee Chairman Bob Goodlatte, R-Va., said that 17 of the top 18 online retailers “have already begun collecting sales tax on both online and in-store sales,” making the issue “less difficult to solve through legislation” if Congress is allowed to solve the issue.
The state with the most at stake in the ruling in terms of reliance on sales tax is Florida, which collected 77.9% of its general fund revenues from sales tax in 2017.
South Dakota was second at 60.6% followed by Tennessee at 59.8%, Texas at 55.5% and Washington at 51.5%. Another 10 states collected between 40% and 49% of their 2017 revenue from sales taxes, according to data provided by the National Association of State Budget Officers. In addition, another 12 states collected between 37.8% and 30.7% from sales taxes.
The GAO report found smaller states are more impacted by the loss of sales tax from e-commerce because they have less of a presence of major retailers.
Only five states – Alaska, Delaware, Montana, New Hampshire and Oregon – don’t levy general sales taxes statewide. Alaska has 107 jurisdictions, however, that levy sales taxes, including the state's capital, Juneau.
Sales tax revenues are an important stable revenue source for states that’s less volatile than personal income tax revenues, according to NASBO.