The U.S. Supreme Court has handed Iowa Republicans a big boost for their recently enacted income tax overhaul by bringing online retail sales into the modern era.
The Republican-controlled Statehouse approved a six-year, $2 billion tax cut predicated to a large extent on federal tax law reforms; an array of new taxes on video streaming services, digital video rentals and ride-sharing services (taxis, Uber, Lyft, etc.) and the likelihood the high court would approve broader online sales tax collection.
The Government Accountability Office estimated Iowa would have collected between $104 million and $146 million in 2017 if all internet retail sales were collected.
The internet was opened to commercial business in 1993, but prohibitions on out-of-state sales tax collections dated back to a U.S. Supreme Court ruling in 1967 and reaffirmed in 1992 (Quill v. North Dakota) that pertained to mail-order catalogs.
The decisions concluded when it came to interstate commerce, states weren’t allowed to collect sales taxes from online retailers without a physical presence in the state.
The top 20 national online retailers, including Amazon (despite President Donald Trump’s tweets to the contrary), collect sales taxes, primarily those without a physical presence in a state.
Wayfair, Newegg and Overstock.com were among retailers resisting a South Dakota law imposing internet sales taxes, leading to the high court showdown. South Dakota doesn’t have an income tax. It is heavily dependent on retail sales taxes.
In the 5-4 ruling, Justice Anthony Kennedy decried “this artificial, anachronistic rule that deprives states of vast revenues from major businesses.”
“A virtual showroom can show far more inventory, in far more detail, and with greater opportunities for consumer and seller interaction than might be possible for local stores,” he added. “Yet the continuous and pervasive virtual presence of retailers today is, under Quill simply irrelevant. This court should not maintain a rule that ignores these substantial virtual connections to the state.”
The decision marked a strange court split. Liberal justice Ruth Bader Ginsburg joined conservatives Kennedy, Clarence Thomas, Samuel Alito and Neil Gorsuch in the majority. Conservative Chief Justice John Roberts dissented with liberals Stephen Breyer, Sonia Sotomayor and Elena Kagan.
Roberts contended Congress should solve the problem. The minority also bought the argument from online retailers that they couldn’t cope with 12,000 local tax jurisdictions, despite software that inevitably will resolve that issue.
After Congress protected online sales with the Internet Tax Freedom Act of 1998, Iowa and 43 other states governments formed the Streamlined Sales Tax Project setting rules to reduce the burden of complying with sales taxes in multiple jurisdictions as a precursor to capturing online sales taxes.
Yet Congress punted, despite the growth of internet sales — notably “pureplay” outlets (internet only), both behemoths and small sellers — while many so-called “bricks and mortar”-only stores were closing shops in malls and on Main Street.
Kennedy seized on Wayfair’s marketing to cite its unfair advantage in boosting its home goods and furniture business.
“Its advertising seeks to create an image of beautiful, peaceful homes, but it also says that ‘one of the best things about buying through Wayfair is that we do not have to charge sales tax,’” he wrote. “What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments.”
Customers do 10 percent of their shopping online. The tax evasion Kennedy cited has been a devastating disadvantage to Main Street and big-box retailers alike — with the many jobs they create as well as the property tax generated for local governments.
The GAO stated state and local government budgets in 2017 would have had an increase of $8.5 billion and $13 billion if they had been able to collect sales taxes from out-of-state sellers.
The Iowa Department of Revenue estimates it will collect $69 million for fiscal year 2019 after the new tax law takes effect Jan. 1. It projects increases to $105.7 million in 2020 and $178 million in 2024.
That is critically important in Iowa. Despite the stock market gains a year ago, which have since flattened, and a continually decreasing unemployment rate, Revenue Estimating Conference projections used to establish state budgets have consistently fallen short of projections.
That has resulted in cuts to universities and community colleges, courts, prisons and human services near the end of their fiscal years.
Among the problems have been overly generous tax credits; the slumping farm economy, which continues to take a hit as China and other nations retaliate against Trump’s tariffs and trade policies; and declining in-state retail sales.
Republicans included “guardrails” in the new tax plan in case revenues are inadequate. The U.S. Supreme Court decision will reinforce their optimism that it could take effect as planned.