By Susan Odum, Extension Educator, Community Development and Planning
In an October 2018 Report, the Government Finance Officers Association (GFOA) outlined the complex issues surrounding taxation of remote sales, including Supreme Court rulings that set precedent on remote sales tax policy for decades. As a result, an ever-growing volume of sales tax went uncollected, resulting in billions of dollars that states and local governments do without each fiscal year.
Why do uncollected sales taxes matter? Magnitude. The internet as a significant retail platform emerged in the 2000s. According to the U.S. Census Bureau, online sales as a percentage of all retail sales grows year after year, and will continue, as shoppers choose online as opposed to retail establishments in their local communities. On Black Friday 2017, as shoppers spent a record $5 billion online, marking an almost 17% increase in sales over the same 24-hour period in 2016. Each year, as a result of internet shopping, revenues that could support essential public services in communities across the country, including public safety, infrastructure, and education go uncollected.
Recent efforts to modernize remote sales tax are aimed at helping existing sales and use tax laws reflect and keep pace with 21st century shopping trends. The intent is to level the retail playing field, ensuring updated tax policies apply to all retailers, whether they are online or in a brick-and-mortar location. Previously, online-only retailers were able to enjoy a 5-10% competitive advantage because they were not required to collect sales taxes.
For decades, the issue of remote sales tax has floundered in the U.S. Congress. As a result, several states have made efforts to enact state laws to address remote sales. In June of 2018, the U.S. Supreme Court issued a landmark decision that paved the way for states to enact laws on taxing remote sales. In South Dakota v. Wayfair, Inc., the Court overturned the long-standing precedent, holding that the physical presence rule is unsound and incorrect given the substantial advancements in technology, siding with South Dakota's law that requires all sellers making sales above a specific threshold into the state to collect sales taxes.
The decision has been seen as a victory, as it removed an outdated standard that restrained the ability of state and local governments to enforce existing sales taxes. Unfortunately, the decision did not prescribe how states should design their remote sales tax laws. Instead, the decision pointed out that South Dakota's law was one way to do it. Bills have been introduced in Congress to establish a national remote sales tax framework; however, none of the bills have successfully passed both chambers. So now we must wait to see how other states will react and whether this decision will motivate Congress to act and create a national framework for sales tax administration.
"Remote sales tax collection can certainly provide much needed revenues to support county and municipal budgets, however, this action alone will not level the playing field or solve all the budgetary issues plaguing our rural communities throughout the country. As the brick-and-mortar locations have left our rural communities, so have real estate property tax payments, income tax payments, jobs, the possibilities of the local multiplier, and the contributions local businesses make to schools, churches, and other non-profit organizations. To ensure that our rural communities remain strong and sustainable, community leaders must identify ways to make the monies currently available in their local economies work harder for them, divert dollars back into local economies by spending locally first, and develop strategies to grow our own through entrepreneurship education and support services." – Susan Odum, University of Illinois Extension
Susan Odum is an Extension Educator, Community Development and Planning with University of Illinois Extension. Odum develops and delivers educational programming to help community groups better understand their role in community economic development; the importance of using data-driven decision making processes; the significance of strategies focused on providing support for entrepreneurs, existing businesses, and new business start-ups; the basis for using the community's unique assets; and the importance of fostering economic development from a regional perspective. Odum has translated research on rural economics into programming, empowering residents of small, rural communities with information and the opportunity to make informed decisions. For more information about her programming, please contact her at sodum@illinois.edu.