Baker Institute expert explores implications of Supreme Court’s ruling on online sales taxation

The U.S. Supreme Court ruled June 21 that states can impose sales taxes on out-of-state retailers, even those that do not have a physical presence in the state. The next key question is whether Congress will act soon to address critical issues such as reducing compliance costs and simplifying the tax-collection process, which would promote interstate commerce and advance economic development, according to an expert at Rice University’s Baker Institute for Public Policy.

Credit: University

Joyce Beebe, fellow in public finance, outlined her insights in a new issue brief, “How Did the Supreme Court Change Online Sales Taxation?” She reviews the implications of the Supreme Court ruling and the legislative developments in online sales taxation over the last 12 months.

“Prior to the ruling, states had been developing creative patchworks to bypass or redefine physical presence, which were not necessarily in the best interest of interstate commerce,” Beebe wrote. “The ruling puts these workarounds to bed, and states can now focus on promoting interstate commerce. The immediate and favorable development would be the elimination of state notice and reporting requirements, which had issues on efficiency and privacy grounds. States are expected to enact their own laws requiring remote sellers to collect sales taxes, taking into consideration features of the South Dakota law. Additionally, although not directly addressed by the court, states may be more confident in pursuing legislation targeting marketplace providers.”

Prior to the ruling, states could not impose a sales tax collection obligation on remote retailers that do not have a physical presence in the state; this is the result of a 1992 Supreme Court ruling, Quill Corp. v. North Dakota. In 2017, South Dakota’s Supreme Court struck down the state’s digital sales tax law (S.B. 106); South Dakota then brought the case to the U.S. Supreme Court in hopes of overturning Quill. Although earlier estimates varied, a recent U.S. Government Accountability Office report indicated that based on current law, state and local governments were already able to collect most remote sales tax revenues that would be owed, Beebe said.

“Most large remote sellers are either established retailers that already have physical stores in many states or have entered into agreements with state governments to voluntarily collect sales taxes regardless of physical presence,” she wrote. “However, the study showed that if states could require out-of-state merchants without a physical presence to collect sales taxes, states would be able to expand their collectible sales tax revenue by $8 billion to $13 billion in aggregate for 2017. For states that do not have personal income taxes and rely heavily on sales taxes, such as Texas, the revenue gain is close to the $1 billion range.”

The report further provided segregated estimates showing that collectible rates and associated revenue gains vary significantly by different types of sellers, Beebe said. “For internet retailers, the current collectible tax revenue can reach 86 percent, indicating an additional 14 percent increase in collectible revenue with the reversal of Quill,” she wrote. “The estimates for marketplace sellers show a completely opposite picture: Only 14 percent of revenue was collectible under Quill; overturning the ruling likely will generate large potential revenue gains. In fact, half of the potentially collectible revenue gains ($4 billion to $6 billion) would come from being able to collect from marketplace sellers.”

Beebe concluded, “The most important future development lies in the issues not addressed in the court ruling, regarding compliance costs and simplification of the sales and use tax-collection process. Congressional action to address these areas remains crucial — all parties agree that Congress has the constitutional authority to regulate interstate commerce. A more streamlined, simplified and uniform compliance process would further promote interstate commerce and advance economic development.”

About Jeff Falk

Jeff Falk is associate director of national media relations in Rice University's Office of Public Affairs.