Opinion

WILFORD: Online Sales Tax Won’t Save Beleaguered State Budgets

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Andrew Wilford National Taxpayers' Union Foundation
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Just over two years ago, the Supreme Court’s decision in South Dakota v. Wayfair overruled past precedent to allow states to impose sales tax obligations on out-of-state, largely online businesses. This decision was hailed as a potential windfall for states at the time, as legislators and state budget accountants giddily anticipated an influx of revenue.

Seemingly, the pandemic makes Wayfair even more important. States are facing substantial budget shortfalls as a locked-down economy and increased social spending take their toll on their bottom lines. While many states have been eagerly planning how to spend their windfall, any Wayfair-induced boost to revenue from online sales taxes is likely to pale in comparison to the budget deficits states will face elsewhere.

Certainly, online retail has taken on a more and more significant role of late. E-retail was already a fast-growing industry, as online retail sales grew 16.6 percent year over year to the end of 2019, compared to just under 4 percent for the retail industry as a whole. The pandemic has further highlighted this divide — while the retail industry as a whole shrank by 1.3 percent in the first quarter of 2020, online commerce still grew by 2.4 percent.

Preliminary data beyond these official numbers continues to paint the (intuitive) picture that online commerce has thrived during the pandemic. Year over year, total retail sales have fallen 1.4 percent through May, while online commerce has grown 30.8 percent.

But here’s the thing: states have consistently overestimated how much revenue they could gain from taxing online sales from out-of-state companies. A National Taxpayers Union Foundation (NTUF) analysis one year after the Wayfair decision found that official revenue estimates from economic nexus taxes came in at around a quarter of what the National Conference of State Legislatures had estimated states could gain, and just under half of what the Government Accountability Office estimated.

Relative to the scope of state budgets, any boost from economic nexus taxes was looking paltry. Overall, the analysis found that online sales taxes generated revenues amounting to roughly 0.7 percent of state general fund revenue. Considering that several states are anticipating revenue decreases of more than 20 percent, not to mention increased spending, a 0.7 percent boost amounts to little more than finding a couple dollar bills in the couch when you’re trying to figure out how to pay your mortgage.

And simply looking at the previously listed numbers on the growth of e-retail during the pandemic to conclude that remote sales taxes will return more substantial revenues now would be to make the same mistake those overly optimistic Wayfair revenue estimates made.

Much of the growth in online retail has come from companies that were already taxable before Wayfair. For example, sales from consumers buying online then picking up their purchase in-store have increased by 248 percent compared to just before the pandemic. That’s “online retail,” but the presence of the physical pick-up location means the sale would have been taxable pre-Wayfair anyway. By the same token, most e-retail giants like Amazon and Walmart already collected sales tax in all 50 states prior to Wayfair — thus, any increase in sales on these platforms would likewise have been taxed anyhow.

Instead, the impact of Wayfair on the pandemic economy is that small- and medium-size businesses have to handle collection and remittance obligations all across the country in the middle of a pandemic and a recession. The administrative burden of collecting and filing sales taxes to states around the country with different tax rates and definitions is no small task in the best of times, and these are far from that.

Unfortunately, states and Congress have often failed to take basic steps to protect small businesses from unreasonable and unnecessary burdens, such as setting higher safe harbors for small sellers, providing a streamlined path to relief so small businesses can challenge unconstitutional burdens, and exempting non-taxable sales from counting towards economic nexus thresholds.

State budget shortfalls and the prospect of paltry amounts of revenue are no excuse for being deaf to the concerns of overburdened small businesses, even (or, especially) during a recession. State budget officials need to understand the limited nature of online sales tax revenues to see past the dollar signs in their eyes to the justified concerns of e-retail businesses.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.