The Supreme Court’s 2018 in the case of South Dakota v. Wayfair prompted many states to begin requiring remote sellers such as e-commerce companies to collect sales taxes from their residents, but now with the inflation rate at a 40-year high, some are offering sales tax holidays and other relief.
A report released Tuesday by the Government Accountability Office in conjunction with a Senate hearing found that after the Supreme Court’s Wayfair decision, states quickly moved to pass new legal requirements for remote sellers, which often differed by state.
“As of June 2021, all 45 states with a statewide sales tax and the District of Columbia had adopted requirements governing sales tax collection by remote sellers based on an economic, as opposed to physical presence (such as a certain amount of sales into the state),” said the report. “All but one had also adopted requirements shifting primary tax collection obligations from sellers in an online marketplace to the company facilitating the sale, such as Amazon, eBay and Etsy.”
The requirements differ in a number of respects, however, including effective dates, exemptions for small businesses below certain thresholds, and how those thresholds are calculated. The new requirements have brought billions in much-needed revenue to states. In 2021, 33 states reported a total of $23.1 billion in remote sales tax revenue to the GAO. In addition, 20 states provided data on the portion attributable to marketplace sales, totaling around $9.5 billion (approximately 41% of total collections from remote sales reported during that period).
However, with inflation mounting this past year, some states that emerged from the pandemic with surprisingly strong tax revenue despite the economic challenges facing residents are reducing taxes in other ways, especially when it comes to gasoline, which has been climbing to an average of over $5 a gallon in many parts of the country.
“Most of the things we’re seeing with respect to gas are indeed shorter-term for several months, six months, or maybe a year, suspensions of one or more of the taxes on gas,” said Charles Maniace, vice president of regulatory analysis and design at Sovos, a sales tax compliance software company, during an interview last month. “Gas is really complicated. It’s subject to different taxes through the supply chain, including at the pump, which may or may not include sales tax.”
However, gas tax reductions don’t seem to have led to any reductions in gas prices actually paid by consumers. “The question is, will a reduction in the gas tax actually result in a drop in price to customers?” said Maniace. “In Connecticut, they passed a one-year suspension of their gas excise tax. And in the bill, the requirement was that retailers must reduce prices at the pump. I don’t know how exactly they’re going to enforce that, but it’s actually baked into the requirements of the bill. Georgia also reduced their gas tax for the month of May. Illinois, in that same budget, is capping their fuel tax. Their fuel tax was scheduled to increase in July because it’s indexed to inflation, but they said, no, in the same budget bill, we’re not going to increase the gas tax, even though it would normally increase based on the current inflation index. Missouri has a proposal to suspend their gas tax for the rest of the calendar year. Missouri has a proposal for a six-month holiday on motor fuel. Maryland passed a 30-day gas tax holiday that already expired. It went from March to April. There’s a lot going on as it relates to gas tax. It’s a combination of increased prices because of Ukraine and overall inflationary pressures.”
Some states have also been giving consumers a break on sales taxes on groceries. In April, Tennessee passed a 30-day pause on grocery taxes, while Oklahoma and Alabama are considering a pause that can last years. This year, according to Sovos, there are 53 bills on sales tax exemptions that states are considering across the country, a 278% increase year over year.
As prices rise on grocery staples like eggs, meat, fruit and vegetables and more, sales tax reductions can help a bit. “Groceries are taxed in about 13 states,” said Maniace. “In some states they’re taxed at the standard sales tax rate and other states, for example, Illinois, they’re taxed at a reduced rate. Last year there were, I believe, 14 or so bills amongst those states that would have either eliminated or reduced the sales tax on groceries. This year, there were more than 50 bills introduced throughout those states. I hazard to say that in every state that has a tax on groceries, there were one or more bills introduced intended to further reduce or eliminate the tax.”
In May, Kansas passed the “Axe the Food Tax” bill to phase out sales taxes on groceries over three years from the current level of 6.5% to 4% as of Jan. 1, 2023, to 2% as of Jan. 1, 2024, and then just zero on Jan. 1, 2025. That won’t provide immediate relief for consumers dealing with surging inflation right now, though.
Other states are moving more quickly, as with Tennessee’s 30-day suspension of the tax on groceries. “It’s really interesting seeing these states take a divergent approach here,” said Maniace. “Do they want to eliminate the tax under the principle of addressing the overall regressivity of sales tax? Or are they trying to do a short-term inflation buster sort of relief. We’re all experiencing high inflation right now. Hopefully the high inflation won’t persist. But while it does persist, we’re going to give you a short-term tax break.”
States are also moving to allow more sales tax holidays like the kind that are traditional in the summertime for back-to-school sales.
“They usually happen either in July or in August, usually for back-to-school type stuff,” said Maniace. “Also, they do it for Energy Star appliances, hurricane preparedness and things like that.”
Florida recently passed a bill that includes both a traditional back to school holiday and a disaster preparedness sales tax holiday. There is also a “Freedom Week” sales tax holiday on a wider array of goods set for the first week of July, as well as on admission charges to various events. Consumers will be able to purchase qualifying recreation and outdoor items and admission to entertainment and cultural events exempt from sales tax. Tax won’t be due on the retail sale of admissions to music events, sporting events, cultural events, specified performances, movies, museums, state parks and fitness facilities, as well as eligible boating and water activity supplies, camping supplies, fishing supplies, general outdoor supplies, residential pool supplies and sports equipment.
Other sales tax holidays are planned in Florida as well. “They’re going to have a holiday for tools,” said Maniace. “I’ve never heard of a holiday for tools before. They’re going to have a holiday for windows and garage doors that lasts two years. Children’s clothing, shoes and diapers — that’s going to last a year. Energy Star appliances, a year. Motor fuel, by the way, for a month. Children’s books for three months. And Energy Star appliances for a year. I’ve never ever in my life seen a slate of holidays that large or that duration. It is unprecedented.”
However, states need to be sure they can deal with the reduction in tax revenue as they too have to deal with inflation pressures and increasing interest rates. “It does put a dent,” said Maniace. “I know in those years where there have been fairly significant budget shortfalls, states have moved to suspend their sales tax holidays or not enact one. But, right now as we speak, state budgets have been pretty much on target, if not higher than projections. The last I checked, 32 states project to be over budget and 10 states project to beyond budget. And that’s pretty good. So in a year like this, states can potentially ‘afford’ a sales tax holiday.”
Meanwhile, some states are counting on the extra revenue they might earn from e-commerce sales after the Supreme Court’s Wayfair decision. “There is a push and pull going on right now where we see some states attempting to expand their sales tax base,” said Maniace. “And they expand it by including things like digital products. There’s a ballot measure in Missouri that, if passed, would allow the state to expand their sales tax to include digital products. There was a bill in Kentucky that would have taxed a laundry list of new services. It was vetoed by the governor, and I’m not sure if they’re going to try to override it or not.”
Some state lawmakers want to increase sales taxes and reduce income taxes. “A bill in Indiana would increase the sales tax and phase out income tax a bit,” said Maniace. “There are bills like that in other states as well. In Nebraska, there were a couple of bills that didn’t get through that would have done the same thing: expanded the sales tax and reduced either the personal income tax or the corporate income tax or both. So over the pandemic, I think states came to understand that the sales tax is a pretty solid and dependable revenue stream. And as a country, we depend less on indirect taxes like sales tax than the rest of our compatriot OECD countries, by a lot. So there’s a bit of a movement afoot to expand the sales tax base, to rely on it a little bit more over income tax, and then contemporaneously to reduce the regressivity of the sales tax by adopting potentially additional exemptions.”
Lawmakers in Congress may need to step in. “Running a small business has always been a big challenge, and these days the impact of inflation is making it even more challenging,” said Senate Finance Committee chairman Ron Wyden, D-Oregon, during Tuesday’s hearing. “Small businesses are also dealing with the impact of the 2018 Supreme Court ruling in the case South Dakota v. Wayfair. In the Wayfair decision, as it’s known, the Court gave states a green light to force small businesses into becoming tax collectors when they sell online — collecting taxes even for states where those businesses had no brick-and-mortar presence. Small businesses had never been responsible for this kind of tax collection before. Almost immediately after the ruling came out, states across the country began passing these tax collection laws.”
Wyden noted that sales taxes in America are extremely complicated. Forty-five states and hundreds of localities have different laws for sales taxes, with different tax rates, different regulations for who collects taxes, and different rules and definitions for taxable products.
“In Illinois, you’ll pay sales tax on a Twix bar, but not on a Snickers. If you take up sewing in New Jersey you’re in for some confusion,” said Wyden. “Yarn bought for art projects will get taxed, but yarn for sweaters — that’s tax free. After the Wayfair decision, small businesses are on the hook for managing that complex web of laws. They’re essentially forced into buying costly software and hiring consultants to get it all straight.”
He believes that in the wake of the Wayfair ruling, Congress should step in and give small businesses relief, exempting small businesses that have revenues under a certain threshold. He pointed to one bill in Congress, the Online Sales Simplicity and Small Business Relief Act, that would do that.
“The Supreme Court’s 2018 Wayfair decision significantly changed the sales tax landscape for states and online businesses,” said Sen. Mike Crapo, R-Idaho, the ranking Republican on the Senate Finance Committee, in his opening statement. “Post-Wayfair, states can require online sellers to collect and remit sales taxes from residents of sales tax states. The decision highlights the challenges for both the public and private sector to evolve with the rapid growth of e-commerce. The share of commerce conducted online has grown dramatically in recent decades due to technological innovation. The COVID-19 pandemic, and the resulting disruptions to normal life, have further fueled its growth.”
He noted that the different standards and thresholds between states and localities can create a burdensome and complex system that makes compliance difficult for small businesses. Internet sellers now need to either learn to comply with the rules of various tax jurisdictions where their customers reside, or hire specialized advisors.
“This compliance can be time-consuming and expensive, especially for small businesses and for merchants in states that do not levy sales taxes, but that must collect and remit sales tax to other jurisdictions,” said Crapo. “While states and multi-state organizations have taken important steps to attempt to ease these burdens, a comprehensive solution to this problem remains evasive. The right of states to levy taxes, and empower their municipalities to do the same, is well-founded on the principle of state sovereignty. On the other hand, as stated in Wayfair, ‘States may not impose undue burdens on interstate commerce.’ Accordingly, a balance must be struck between ensuring states can collect sales tax due and ensuring that business activity is not stifled, particularly as the risk of recession rises. Businesses should be able to determine the taxes that are due, collect them, and remit them to the relevant authorities with minimal headache and expense. A sales tax system with more consistent thresholds and standards would allow businesses to more efficiently comply, and provide tax certainty, reducing the risk of future audits and penalties.”