States set to gain billions in sales taxes after court ruling

U.S. states could reap billions in online sales tax revenue and buttress their budgets after the nation's top court ruled Thursday that e-commerce companies could be required to collect the money, even if they have no physical presence in a state.

The Supreme Court's ruling in favor of South Dakota and against Wayfair and two other online retailers was a victory for state governments, and a boost for brick-and-mortar stores.

The effect is expected to be positive and widespread because 45 states impose sales taxes and until now were barred from requiring those companies to collect remote sales taxes.

That meant state and local governments lost as much as $13 billion of revenue in 2017, according to a federal report.

Now, states can push ahead with legislation requiring companies to collect and remit sales taxes for goods bought online elsewhere.

States that rely more heavily on sales tax - as opposed to personal income tax, for instance - "are the big winners here and could see real budget gains if they follow South Dakota's example," said Fitch Ratings analyst Stephen Walsh.

As many as 24 states and their local governments could see tax revenue gains of at least 1 percent, according to Fitch's research.

For a large state like Texas, the combined state and local revenue growth could be as high as $1.2 billion per year and will likely grow over time, Walsh said.

Washington, Florida, South Dakota, Nevada and Tennessee get more than half of their total revenues from sales taxes, meaning big gains could be in store.

An analysis by Barclays found that Louisiana would get an estimated 3 percent bump in total tax receipts if it begins forcing out-of-state online retailers to collect sales taxes. Oklahoma could also see a sizeable 2.7 percent gain, Barclays found.

But the party does not extend to places that do not charge sales taxes: Alaska, Delaware, Montana, New Hampshire and Oregon.

"New Hampshire's lack of a sales tax is a competitive advantage for our state, and this decision will unfairly punish small businesses that are the backbone of our economy," U.S. Senator Maggie Hassan said in a statement.

STATE MOVES NOT CERTAIN

The decision "will remake the landscape for state tax collection in the U.S.," said Harley Duncan of the auditing firm KPMG.

However, the path is not clear. The court left room for future legal challenges, so state legislation could still face delays and backlash from the e-commerce industry.

The ruling "definitely goes out of its way to suggest there may have to be future litigation to decide ultimately where things will shake out," said lawyer Paul Clement, who filed a brief backing Wayfair.

"You will certainly see, absent congressional action, significant litigation as states try to push the envelope on this," said Mike Dabbs, eBay's senior director of government relations.

Even so, most states may look to pass bills similar to Washington state's, said Max Behlke of the National Conference of State Legislatures.

Its law was effective even before the court ruling, Behlke said, by expanding sales tax collections to third-party marketplaces - a category that in most places has so far gone untaxed.

That led Amazon.com to start collecting taxes on its entire platform, including third-party merchants, in Washington starting in January.

Amazon then added Pennsylvania to that list after a similar law there went into effect April 1.

Even before that change, Pennsylvania got $202 million of online sales tax revenue in 2017 - 2-1/2 times as much as it did in 2014, when it received just $81.2 million, according to information the Pennsylvania Treasury provided to Reuters.

Minnesota and Rhode Island passed similar "marketplace laws" last year.

Ahead of the court ruling, Illinois enacted a budget that counts on $150 million in new tax revenue - to come from out-of-state internet retailers - for fiscal 2019, which begins July 1.

A new Connecticut law goes into effect at the end of this year to collect taxes from some online retailers. Now the legislature should consider going back into session to broaden that law and "eliminate the disadvantage retailers with physical locations in Connecticut have long struggled to overcome," said Senate Republican President Pro Tempore Len Fasano.

In total, 38 states have considered and 15 enacted, measures aimed at collecting remote sales taxes since 2016.

"There has been pushback against these new laws but the new ruling gives states more support for these positions," said Fitch's Walsh. "I expect we will see both new legislation and additional legal challenges over the next few years."