States could gain billions in annual revenue if given authority to collect sales tax from remote sellers, while online business would likely see increases in compliance costs, according to a report released Dec. 18 by the U.S. Government Accountability Office.
Some states along with a broad swath of retailers with brick-and-mortar stores have been fighting to change a 1992 Supreme Court decision that set a legal precedent stipulating that a state can only require a business to collect sales taxes if it has a physical presence in that state.
In its 55-page report, the GAO found that states have been losing revenue because they do not currently have the authority to require sales tax collection from remote sellers. The report said state and local governments could have gained between $8 billion and $13 billion in revenue in 2017 if states were given the authority. According to the GAO, that figure would be roughly 2% to 4% of total 2016 state and local government general sales and gross receipts tax revenues.
The average gain for states would be roughly $200 million, with estimates ranging from $20 million for states including Vermont and Wyoming, to more than $1 billion for states including Texas and California. The GAO based the revenue estimates on actual and estimated sales data for remote sellers, excluding sales already collected by sellers or those exempt from taxation.
Currently, 45 states and the District of Columbia impose sales taxes. The GAO estimated that current law requires remote sellers to collect roughly 75% to 80% of the taxes that would be owed if all sellers were required to collect tax on all remote sales.
However, the agency also said that software-related costs, audit and assessment compliance costs, and costs associated with research and liability could all rise for businesses as a result of the added tax jurisdiction calculation and collection.
"We found that businesses with limited experience in multistate tax collection and those that lack software systems designed to facilitate multistate tax collection would incur the highest costs under such a scenario," the report stated.
The report comes as the U.S. Supreme Court considers a South Dakota case that could challenge the 25-year-old sales tax collection decision by the Supreme Court that ruled that remote sellers were not required to collect sales taxes if they did not have a physical presence in the state.
The South Dakota Supreme Court ruled in September that the state's law requiring certain companies without a physical location in South Dakota to collect sales tax violated Quill Corp. v. North Dakota, the 1992 Supreme Court decision that dictates remote sellers are not required to collect sales taxes without a physical presence in the state. The following month, the state of South Dakota petitioned the U.S. Supreme Court to take up South Dakota v. Wayfair Inc., where it argued that consumers shopping online must enter their address during checkout, which allows for the ability to calculate and collect sales tax.
Retailers have argued that the Quill ruling favors online sellers over brick-and-mortar stores, while other proponents say that state and local governments have lost billions of dollars in revenue as a result of not collecting the taxes.
Retail Industry Leaders Association Senior Executive Vice President and General Counsel Deborah White said in a Dec. 19 news release that overturning Quill is long overdue, primarily because it was decided before the advent of e-commerce.
"The GAO report is confirmation of the damage that's been done to state budgets and brick-and-mortar retailers since the 1992 Quill decision," White said.
In addition to the possibility of judicial review by the high court, several bills are currently pending before Congress, although previous legislative attempts over the past quarter-decade to change the online sales tax collection landscape have been unsuccessful.
Several states, including South Dakota, have proposed their own online sales tax measures in the 25 years since the Quill decision, as Congress has chosen not to take up legislation on the matter.