The U. S. Supreme Court has shown it can change its mind and a new ruling that lets states collect sales taxes from out-of-state internet retailers gives Missouri government a new opportunity as well as some new issues to confront.
All reasons for NOT collecting taxes on out-of-state internet sales seem to have been eliminated by the court’s narrow decision to throw out a 1992 ruling saying out-of-state internet merchants would not have to collect state sales taxes and pay them to the purchaser’s state unless the company had a substantial presence in a state.
That ruling in the early days of internet commerce put brick and mortar businesses in Missouri and other states at a disadvantage and they’ve been aggravated for years that the legislature hasn’t corrected the problem. The legislature has said its hands have been tied by the 1992 ruling.
The ropes are off now. We’ll be interested to see if state leaders next year call for passage of a law requiring collection of that sales tax. There is no doubt the state could use the money.
The legislation will not be easy to write although the court ruling does provide some hints about what will work.
It would not be surprising to hear some voices claim—as they have in the past—that imposing sales taxes on internet merchants would be a tax increase on purchasers and therefore not something the state should lay upon the shoulders of taxpayers who have avoided sales taxes on certain purchases up to now. We’ll have to see if that lame argument still has any legs in a state that continues to rank in various studies in the lower third of all states for overall tax burden.
The court ruling makes it harder to justify saying, “We’re pro business” while maintaining a sales tax policy that puts our home-town merchants at a sales disadvantage to businesses that exist on our computer screens.
And where do we get the idea that the computers on our desks or in our pockets are not some kind of a “physical presence” in our state? Let’s be honest and admit that the internet long ago became more a physical presence in our lives than Wal-Mart. We don’t have to drive across town to buy something on the internet, after all.
Checking out through Paypal is no different from checking out at the local counter. The buyer doesn’t physically stick a credit card into a slot at a cash register with Paypal. But internet merchants do have a cash register right in front of us—the computer that is a very real physical presence. My brick and mortar house becomes an internet merchant’s physical presence in my town and my state every time I check out with Paypal or some similar system. (Ohio tried to address the issue with a law saying the use of cookies on consumer’s computers by internet retailers constitutes a “presence.” The retailers are fighting the idea in court.)
The danger, as some might see it, to requiring sales taxes to be collected on internet purchases is that state revenue might increase to the point that some lawmakers will decide to once again ease the overall tax burden on Missourians again.
That idea is getting pretty old. And shaky.
Political commentator Josh Barro, a former staffer at the Tax Foundation (considered a conservative think tank) who contributes to Business Insider, observes in a new article that the court decision reminds states of the Constitution’s Commerce Clause that says states cannot unduly burden or discriminate against businesses from other states.
South Dakota, which brought the lawsuit, avoids that pitfall by providing those retailers with computer software that makes it easier for them to pay sales taxes. It does not require those retailers to deal with the state and every political subdivision within it that charges sales taxes. The money goes to a central state agency. Our Department of Revenue, which collects sales taxes collected by our local businesses and then sends proper amounts to local governments, would fill that role with internet sales taxes.
Missouri has not joined the twenty-or-so states that have signed on to the Streamlined Sales and Use Tax Agreement. Those states have agreed to some common rules dealing with their sales taxes. This ruling might encourage a new legislature (The 2019 General Assembly will have new leadership and several dozen new members) to take a new look at the SSUTA as it considers what to do to capitalize on the ruling.
One of Barro’s former colleagues at the Tax Foundation, Joe Henchman, says, “If you want to be absolutely sure that your statute is valid under these rules, you should try to emulate South Dakota as much as possible.” So that’s a starting point.
Barro makes an important observation that some Missouri leaders seem to have been going against for some time: “It is important for a tax system to be adequate—that is, revenues should grow on pace with the economy, so the government can keep pace with the demand for services as the economy grows.”
He notes tax-free purchases from internet retailers distorts the behavior of purchasers by encouraging them to buy online when they otherwise would buy at a local store, thus reducing local tax collections and that means “the government either has to cut back on services or it has to raise taxes on something else.” The resulting erosion of sales tax income at the state level has put a heavier burden on property taxes and “taxpayers have revolted against increases in this inflexible tax, voting to impose caps that have in some states kept revenue growth well below economic growth.”
Add to that the penchant government has to lower various taxes under the philosophy that lower taxes will mean more jobs that will stimulate the economy and you can get a state that reduces services that industries and employers would like to see before they commit to creating jobs.
So Missouri has an opportunity because of the court ruling.
Justice Anthony Kennedy, writing for the majority in the Supreme Court decision, estimates the ruling could mean eight to thirty-three Billion dollars in annual tax revenues for the states. The federal Government Accountability Office thinks Missouri’s share would be $180-275-million a year in state and local sales taxes.
Missouri could do a lot with that amount of money at the state and local levels. Except—
We have the crippling Hancock Amendments.
Those parts of our state constitution put a ceiling on how much new taxes can be collected without a statewide vote. State Auditor Nicole Galloway, a little more than a year ago, estimated that taxes at the statewide level could not increase by more than $94-million without such a vote. We’re not sure how much of the figure from the GAO would go to the state and how much would go into local government revenue accounts, but Hancock appears to put a cloud over the issue at the state level.
Before the passage of what was called Hancock II, the state had to make refunds to income tax payers if state revenue growth exceeded the original Hancock limits. The state did make those refunds for a couple of years before adopting the first of a series of tax cuts to make sure the state did not to go to the inconvenience of mailing out checks. The state hasn’t come close to hitting the refund threshold since Hancock II. In fact, Auditor Galloway says Missouri is four BILLION dollars under that limit now.
Will voters support the new authority given Missouri by the U. S. Supreme Court to collect more than $94-million in internet sales taxes? Will collecting six or seven or eight cents per dollar from an out-of-state internet seller increase state revenue so much that a statewide vote will be required, giving Missourians a chance to reject the proposal? The GAO and the state auditor have put forth figures indicating that vote might be needed.
We have had about two decades of leadership telling voters their taxes are too high. We’ve seen voters who travel to the polls on increasingly bad roads that go across increasingly crumbling bridges refuse to support gas tax increases to make their journey smoother and safer. And the legislature has taken steps year after year to reduce the state’s financial ability to “keep pace with the demand for services as the economy grows.”
The court has presented Missouri with a gift. Will Missourians decide to leave it unopened?
(You can read Josh Barro’s article at https://amp.businessinsider.com/supreme-court-wayfair-internet-sales-tax-decision-good-for-consumers-2018-6)