Many states looked forward to a windfall of internet sales tax revenue in the wake of last year’s Supreme Court case that expanded their taxing power, but nationwide, budget projections are coming up billions of dollars short. The massive expansion of taxing power hasn’t led to big tax receipts for state governments, even as thousands of small businesses across the country now have to comply with more onerous tax filing administrations.
Last June, in South Dakota v. Wayfair, the Supreme Court ruled that states could tax remote sellers without any physical presence within their borders. This ruling, which overturned decades of precedent, created chaos as smaller retailers were suddenly expected to file taxes in dozens of states around the country.
Adding to the chaos, state governments often went ahead with hasty and poorly considered rules in order to capture revenue as quickly as possible, in some cases even bypassing the legislative process and implementing the new tax through administrative rulemaking. However, while these measures were defended in the name of the revenue windfall they would bring in, the windfall turned out to be little more than a light breeze.
The National Taxpayers Union Foundation (NTUF) looked at two estimates, considered authoritative leading up to the Court’s decision in Wayfair, that broke down the amount of revenue each state was missing out on due to the physical presence standard. One estimate came from the National Conference of State Legislatures (NCSL), using data from University of Tennessee professors William Fox, Donald Bruce, and LeAnn Luna. The other came from the Government Accountability Office (GAO), the federal government’s auditing and research arm. These studies were used repeatedly to sell lawmakers and judges on the notion of granting states new taxing power.
These estimates were compared with official revenue estimates in 32 states made after the Wayfair decision came down. The verdict? Actual revenue is now estimated to be half the amount that GAO estimated, and just one quarter the amount NCSL estimated. Lawmakers in these states were promised as much as $19 billion in new revenue, but the actual number appears to be just $3.6 billion.
Framed in the context of total state budgets, one sees how small a “windfall” this truly is. Based on NTUF calculations, Wayfair revenues represent just 0.7 percent of total state general fund revenue in these states, a nearly meaningless amount. Certainly not revenue worth burying small businesses over.
Why were these estimates so far off? One major reason is that those predicting a gradual takeover of the retail market by online businesses have proved to be largely incorrect. Instead, retail is converging on a so-called “brick-and-click” model where online retail and in-person sales are combined, like Walmart’s aggressive expansion of its web presence or Amazon’s purchase of Whole Foods and creation of bookstores.
Yet states have pushed forward with remote seller rules that are often harmful and poorly considered. Just recently, Kansas moved to become the first state without any small-seller exception, meaning that it would attempt to make an arts and crafts enthusiast in New Hampshire that sold a single bracelet to a Kansan on Etsy file taxes in Kansas. Actions such as these reflect a lack of caution and concern for smaller businesses without the legal capacity to file taxes in each state around the country without being buried under the mountain of compliance obligations.
States with sales taxes on the books should consider the reality of the revenues to be gained when considering updates to their post-Wayfair taxes. Tax revenues are hardly a good reason to kill small businesses in the first place, but the meager revenues at issue in this case are certainly not.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education for all levels of government.
Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.