Virginia Considers Taxing Online Sales by Out-of-State Retailers

Published November 26, 2018

Virginia Gov. Ralph Northam is calling for legislation that would apply the state’s sales and use taxes to goods sold over the internet by out-of-state retailers.

Virginia Secretary of Finance Aubrey L. Layne Jr. told of the governor’s intention in response to questions during testimony before the Virginia House Appropriations Committee in October.

Layne said the governor would present his plan in January. The proposed tax could begin after June 30, 2019, Layne told the legislators, and would include an exemption for small retailers.

The governor’s proposed internet sales tax could raise up to $250 million per year in new revenue for the state government, Layne told the committee. However, many online retailers already remit the sales tax, Layne said. 

Wayfair or Foul?

Earlier this year, the U.S. Supreme Court, in the case of South Dakota v. Wayfair, ruled South Dakota has the authority to tax sales to its residents from out-of-state retailers with no property or employees in the state, overturning a longstanding prior ruling.

The Court ruled the law would not be a significant liability to interstate commerce, given the simplicity of South Dakota’s sales tax, says Caleb Taylor, policy director at the Virginia Institute for Public Policy.

“The Supreme Court was really straightforward about the reason that this is okay, that being South Dakota’s very simplified sales tax system doesn’t create a major burden on interstate commerce,” Taylor said.

In contrast to the situation in South Dakota, Virginia’s sales tax system is complex and businesses’ compliance costs are high, Taylor says. 

“Virginia would actually have to change their sales tax system and simplify it and streamline it in order for Northam to get away with this without being sued by every out-of-state business around,” said Taylor.

‘They Will Buy Less’

Taxing internet sales would damage Virginia’s economy, says Charles N. Steele, an associate professor of economics at Hillsdale College and a policy advisor to The Heartland Institute, which publishes Budget & Tax News.

“If we raise taxes on an activity, we get less of it,” said Steele. “There’s no doubt that an internet sales tax will reduce commerce.

“The primary effect for people in Virginia will be on those who have been making purchases from outside the state,” Steele said.

Burdens on Small Business

The proposed tax would affect smaller out-of-state online businesses the most, Steele says.

“The tax would disproportionately harm small internet businesses,” said Steele. “Very large firms have staff accountants and attorneys. For them, compliance is easier.

“On the other hand, small entrepreneurs find it much harder to follow the various state laws,” Steele said. “Even though the governor proposes to exempt smaller businesses, a business owner must study the law to determine whether she or he is exempt, and also correctly forecast the extent of her or his business.”

Steele says the tax would undermine all of Virginia’s economy.

“If passed, the tax would raise the cost of living and the cost of doing business for Virginians,” said Steele. “That’s not a formula for economic growth.”

Owen Macaulay ([email protected]) writes from Hillsdale, Michigan.