The 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. opened the floodgates for a torrent of new internet sales taxes. The push for internet sales taxes is at least partially driven by unrealistically high estimates for tax revenue states were not collecting prior to the 2018 ruling.
Many states are enacting new internet sales taxes because of the revenue potential noted in two recent studies. The first, a 2015 study from the National Conference of State Legislatures (NCSL), claimed states did not collect sales taxes on $25.9 billion in revenue from out-of-state business. Another, more conservative study from the Government Accountability Office (GAO) estimated that states failed to collect sales taxes on $8.5–13.4 billion in 2017 revenue.
According to a new study from the National Taxpayers Union Foundation (NTUF), these estimates are far from the reality of what states can expect to generate in new tax revenue from the internet sales tax. The NTUF study compared the NCSL and GAO estimates to recently released authoritative estimates of revenue associated with new remote sales tax legislation and assesses the initial accuracy of the revenue projections. The results found that no states met or exceeded NCSL’s revenue estimates, and only two states met or exceeded the midline of the GAO range of tax revenue estimates.
“On average, official estimates were about one quarter the amount that NCSL estimated (25.96 percent) and about half the amount that GAO estimated (49.85 percent). The median official estimate was just 21.81 percent of NCSL’s projections and 46.75 percent of GAO’s,” the study concluded.
Applying sales taxes to internet transactions produces significant consequences. First, the power state governments wield over retailers outside their borders dramatically expands. Second, because states have very different definitions and rules on sales taxes, confusion and uncertainty for out-of-state buyers and sellers are inevitable. Supporters of online taxes argue these taxes are needed to restore a competitive balance between online and brick-and-mortar retailers. However, the imposition of sales taxes on internet transactions would slow the growth of e-commerce, one of the key growth sectors of the U.S. economy.
Given the dire condition of many state budgets, it is likely that many states will enact such taxes to address budget deficits. States that currently exempt sales tax on e-commerce purchases—Alaska, Delaware, Montana, New Hampshire, and Oregon—would be better off maintaining the status quo.
From onerous licensing laws to heavy fees and burdensome regulations, small businesses already face too many barriers. Adding a new internet sales tax would only increase the strain on small businesses. According to the Tax Foundation, there are more than 10,800 sales tax jurisdictions in the United States. Although tax software can help online sellers navigate this quagmire, it remains very difficult to properly allocate the various sales tax levies—especially when rates change frequently.
Although the ideal approach to internet sales taxes is to avoid them altogether and stop forcing out-of-state businesses to serve as government tax collectors, state legislators can limit the negative effects of these laws in a number of ways. For example, they could keep the sales tax threshold as high as possible, making it less likely economic activity would be reduced substantially. States could also implement a sales tax system based on where the product was sold, known as an origin-based tax system. This would encourage economic growth by bringing simplicity and certainty to the state sales tax quandary.
The following documents examine state internet sales taxes in greater detail.
Wayfair Revenue Estimates Come Up Short
https://www.ntu.org/library/doclib/2019/08/Wayfair-Revenue-Estimates-Come-Up-Short-3.pdf
In this Issue Brief, Andrew Moylan and Andrew Wilford of the National Taxpayers Union Foundation examines the revenues collected by states that expanded their sales taxes to include internet sales and found that official post-Wayfair revenue estimates are coming in at a mere fraction of what earlier estimates claimed: roughly one-quarter as much as the highest projections.
SCOTUS Decision in Wayfair Prompts States to Enact Similar Sales Tax Laws
https://gkglaw.com/publications/548-scotus-decision-wayfair-prompts-states-enact-similar-sales-tax-laws
In this article, Matthew Journy of GKG Law examines how states are reacting to the Wayfair decision and how they are crafting their internet sales tax laws.
What Does the Wayfair Decision Really Mean for States, Businesses, and Consumers?
https://taxfoundation.org/what-does-the-wayfair-decision-really-mean-for-states-businesses-and-consumers/
In this Q&A, Joseph Bishop-Henchman of the Tax Foundation discusses the Wayfair decision and the potential effects it could have on states.
Sales Taxes: The Way Forward after Wayfair https://www.prairiebusinessmagazine.com/business/markets/4562787-sales-taxes-way-forward-after-wayfair
Tom Dennis of Prairie Business examines how the Wayfair decision has substantially changed the sales-tax rules of interstate commerce.
What Do I Need to Know about the Wayfair Case and Economic Nexus?
https://www.salestaxinstitute.com/sales_tax_faqs/wayfair-economic-nexus
This article from the Sales Tax Institute examines the effects of the Wayfair decision, how economic nexus works, and provides advice on how businesses should react to the new changes.
Previewing SCOTUS South Dakota v. Wayfair Online Sales Tax Case
https://taxfoundation.org/previewing-scotus-south-dakota-v-wayfair-online-sales-tax-case/
In this article, Joseph Bishop-Henchman examines the details of the South Dakota v. Wayfair case and speculates how the justices may rule based on previous cases.
Understanding an Internet Sales Tax
https://cei.org/content/understanding-internet-sales-tax
Jessica Melugin of the Competitive Enterprise Institute examines the effort by states to expand their internet sales taxes to draw more revenue from taxpayers. Melugin argues in favor of the origin approach of taxation, a sales tax system where the sales tax is determined based on where the product was sold.
Taxes on Remote Sales
https://heartland.org/publications-resources/publications/taxes-on-remote-sales
This election brief from the Kem C. Gardner Policy Institute at the University of Utah examines the complexity of online sales, including the legal context and the growth of online sales, and provides some policy options for consideration.
Policy Tip Sheet: Myth vs. Fact – Internet Taxes
https://heartland.org/publications-resources/publications/policy-tip-sheet-myth-vs-fact—internet-taxes?source=policybot
In this Heartland Institute Policy Tip Sheet, John Nothdurft examines several myths and facts about internet taxes.
Should Congress Act Before SCOTUS On Online Sales Taxes?
https://taxfoundation.org/congress-act-scotus-online-sales-taxes/
Joseph Bishop-Henchman of the Tax Foundation examines how Congress could act to preserve the physical presence standard and move towards a better system for taxing online sales.
Research & Commentary: Internet Sales Taxes
https://heartland.org/publications-resources/publications/research–commentary-internet-sales-taxes
This Heartland Institute Research & Commentary on internet sales taxes explains how taxing the internet hurts business and fails to bring in the revenues proponents hope for: “The new tax-remittance burden, however, would fall on online retailers. It would add to their costs and could demolish one of the last remaining redoubts of vibrant economic enterprise—the last thing any state needs during a deep recession.”
The Internet, Sales Taxes, and Tax Competition
https://heartland.org/publications-resources/publications/the-internet-sales-taxes-and-tax-competition
Veronique de Rugy and Adam Thierer discuss the Main Street Fairness Act in this study from the Mercatus Center. The new legislation would force retailers to collect sales taxes for states joining a formal tax compact. The authors examine alternatives to the tax, including an origin-based sales tax.
An “Original” Solution to Taxation of Online Sales
https://heartland.org/publications-resources/publications/an-original-solution-to-taxation-of-online-sales
Writing for the American Legislative Exchange Council, Andrew Moylan discusses the origin-based sourcing rule for internet sales taxes and explains how it solves many of the problems created by destination sourcing: “Perhaps the most important advantage of origin sourcing, however, would be the infusion of tax competition it could engender. Under such a system, businesses would have an incentive to invest in lower-tax jurisdictions so as to attract price-conscious customers.”
States Already Can Tax Out-of-State Purchases, but Rarely Enforce those Laws
http://www.aei.org/article/economics/fiscal-policy/taxes/states-already-can-tax-out-of-state-purchases-but-rarely-enforce-those-laws/
Michael S. Greve of the American Enterprise Institute considers an overlooked issue in the internet sales tax debate: the often-unenforced use tax. Currently, if a product is purchased from a “remote” seller with no contact with a consumer’s state, the sale is not “tax-free”—the consumer owes a “use tax” equivalent to the local sales tax. Many states do not enforce this tax.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact the government relations team at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
