The rise of e-commerce leaves state budgets shortchanged

It’s 1992 and you need a blender. You’re likely to visit the nearest department store and pick from the options on your local store’s shelf. Fast forward to 2018—today’s shopper is likely to go online to pick from the thousands of models on the virtual shelves of internet retailers.

However, the laws around sales tax collection have not caught up with the new reality of retail, costing states billions of dollars a year in lost revenue. This issue has spurred several court cases and might be resolved by the Supreme Court with South Dakota v. Wayfair on Tuesday.

{mosads}The U.S. Supreme Court decision controlling this issue, Quill Corp v. North Dakota, held that retailers don’t have to collect states sales tax unless they have a physical presence in the state. That might have been fine 16 years ago when Quill was decided, but in a world where this past holiday season saw an estimated $100 billion in digital transactions, with a record $6.59 billion on Cyber Monday, state and local governments—and their constituents—are losing big.

This shift in purchasing practices means state and local governments did not collect between about $8 billion to about $13 billion in sales tax revenue in 2017, according to a recent estimate prepared by the nonpartisan Government Accountability Office. Other studies suggest this number could grow to $52 billion in lost revenue by 2022, revenue that could be used by states and municipalities to offset other taxes or to fund education, health care, transportation projects, public safety and human services.

During my service as Taxation Committee chair in the Kansas House, I worked hard to maintain a diversity of revenue sources. As a rule of thumb, I tried to fund state government with a balanced mix of income, property and sales taxes. Currently, 45 states levy taxes on the sale of goods and certain services and many localities rely on sales taxes to finance essential government services. In fact, sales taxes alone now account for 34 percent of state revenues.

Congress has failed to bring sales tax collection law into modernity. Their failure to act puts local brick and mortar businesses in their districts at a competitive disadvantage and starves state and local governments of sales tax revenues. It also allows remote retailers to enjoy the benefit of state services without paying for them.

The Council of State Governments has submitted a brief in support of the position of the state of South Dakota, which seeks to overturn the previous case law set in Quill Corp v. North Dakota. Several years ago, South Dakota enacted a law requiring remote retailers to collect and remit sales taxes on purchases made in South Dakota. Thirty-one other states have also expanded their state tax collection authority to sellers with no physical presence in their state.

The Council of State Governments stands with the states. We are hopeful the Supreme Court will side with CSG’s sound legal reasoning and overturn its outdated requirement of a retailer’s physical presence. That’s the only way to make sales taxes fair. For too long, our tax law has fallen woefully out of step with how commerce is conducted today. It’s time to bring the way we collect and remit sales taxes into the modern age.

David Adkins, a former Kansas legislator, leads The Council of State Governments as its executive director and CEO. The Council of State Governments is a nonpartisan, nonprofit organization serving all three branches of state government. CSG champions excellence in state government to advance the common good.