For years, states have not imposed internet sales taxes on persons or businesses without a physical presence in the state. However, this changed in 2018, when the U.S. Supreme Court upheld South Dakota’s internet sales tax law in South Dakota v. Wayfair, Inc. In effect, the ruling overturned the 25-year-old “physical presence” standard set in Quill Corp. v. North Dakota.
Many states considering an internet sales tax have modeled their legislation after South Dakota’s. Under South Dakota’s law, all online retailers pay state sales taxes, regardless of whether the seller has a presence in the state. South Dakota’s internet sales tax includes concessions for small businesses. For instance, it only applies to retailers that generate more than $100,000 per year in gross revenue from South Dakota customers or conduct more than 200 transactions per year in the state.
For many states, adopting South Dakota’s model would be a mistake. Although a $100,000 threshold may work for states such as South Dakota, this threshold is most likely far too low for other states, where more businesses surpass the $100,000 figure.
While several states have adopted South Dakota’s model, others have expanded the thresholds to exempt more small businesses. Alabama, Connecticut, Georgia, and Mississippi have set their threshold at $250,000. In Massachusetts and Tennessee, the threshold is $500,000. If a state chooses to impose an internet sales tax, it should set the threshold as high as possible. This would protect small businesses, which are the backbone of local economies.
Applying sales taxes to internet transactions produces significant consequences. First, the power state governments wield over retailers outside their borders would dramatically expand. Second, because individual states have different definitions and rules on sales taxes, confusion and uncertainty for out-of-state buyers and sellers is inevitable. Third, the imposition of sales taxes on internet transactions would slow the development of e-commerce, one of the key growth sectors of the American economy.
From onerous licensing laws to heavy fees and burdensome regulations, small businesses already face a battery of barriers. Adding an internet sales tax would increase the strain on small businesses. According to the Tax Foundation, there are more than 10,800 sales tax jurisdictions in the United States. Although tax software can help online sellers navigate this leviathan, it remains very difficult to properly allocate the various sales tax levies—especially when rates change frequently.
Although the ideal approach to internet sales taxes is to avoid them altogether and stop forcing out-of-state businesses to serve as government tax collectors, state legislators can at least negate their detrimental effects. At the very least, state lawmakers should set the revenue threshold (or the transaction threshold) as high as possible. By doing so, the tax is less likely to impede small businesses, which are the driving force of the U.S. economic engine.
The following documents examine state internet sales taxes in greater detail.
What Does the Wayfair Decision Really Mean for States, Businesses, and Consumers?
https://taxfoundation.org/what-does-the-wayfair-decision-really-mean-for-states-businesses-and-consumers/
In this “Q&A,” Joseph Bishop-Henchman of the Tax Foundation discusses the Wayfair decision and the potential effects it could have on states.
Understanding an Internet Sales Tax
https://cei.org/content/understanding-internet-sales-tax
Jessica Melugin of the Competitive Enterprise Institute examines the effort by states to expand their internet sales taxes to draw more revenue from taxpayers. Melugin argues in favor of the origin approach of taxation, a sales tax system where the sales tax is determined based on where the product was sold.
Taxes on Remote Sales
https://heartland.org/publications-resources/publications/taxes-on-remote-sales
This election brief from the Kem C. Gardner Policy Institute at the University of Utah examines the complexity of online sales, including the legal context and the growth of online sales, and provides some policy options for consideration.
Research & Commentary: Internet Sales Taxes
https://heartland.org/publications-resources/publications/research–commentary-internet-sales-taxes
This Heartland Institute Research & Commentary on internet sales taxes explains how taxing the internet hurts business and fails to bring in the revenues proponents hope for: “The new tax-remittance burden, however, would fall on online retailers. It would add to their costs and could demolish one of the last remaining redoubts of vibrant economic enterprise—the last thing any state needs during a deep recession.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Heartland’s government relations team at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.