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<i>The Week in Public Finance:</i> Thanks to SCOTUS, States Are Taxing Online Sales. But the Legal Fight May Not Be Over.

In its bid to start collecting a sales tax on internet purchases, Colorado could run afoul of the Supreme Court's ruling.

The U.S. Supreme Court has OK'd taxing online sales taxes. Now states just need to figure out how to do it.
(AP/Nati Harnik)
The U.S. Supreme Court may have ruled that states can collect sales taxes for online purchases, but it turns out it's not so easy. Thanks to the complexities of tax structures in some states, the legal challenges may not be over.

This week, Colorado signaled it was moving forward on taxing out-of-state retailers by notifying them of a new requirement. In order to sell goods online to Coloradans, retailers have to register by Nov. 30 for a remote seller’s license.

But here’s the potential problem: As it's worded, Colorado's notice puts the onus on out-of-state retailers to figure out how to comply with one of the most complicated taxing structures in the country. The state has more than 300 separate sales tax jurisdictions which are locally administered. In its landmark sales tax ruling, Wayfair v. South Dakota, the Supreme Court said that a state may require collection of sales tax by out-of-state internet retailers so long as the law does not discriminate against or place excessive burdens on retailers.

For a number of states, that's not an issue. But Colorado's amount of variance between jurisdictions means it might run afoul of what the Supreme Court said was appropriate. “Where the state law can get really messy is where you have a bunch of jurisdictions making the decision about what is taxable and what isn’t,” says John Buhl, the Tax Foundation’s media relations manager. “These things can really pile up compliance costs.”

Those costs, which include not only collecting the appropriate tax rate but filing annual tax returns, can run into the tens of thousands. And for small businesses, that extra expense may not be worth the added, out-of-state business.

For its part, Colorado will exempt retailers whose sales in the state do not exceed $100,000 or 200 transactions annually. Colorado Department of Revenue Executive Director Michael Hartman also said in a press release that the state “will pave the least burdensome road possible for businesses to comply with these regulations.”

States are navigating this new taxing era as more and more purchases are shifting online. Last year, Americans spent nearly $20 billion online over the five-day period from Thanksgiving through the following Monday. While much of this spending is at major retailers that are already collecting a sales tax, states are still missing out on millions in revenue from those that aren't. 

Currently, roughly half of states have legislation pending or in place to begin taxing online retailers within the next four months. Most of these states, like Colorado, have local sales taxes in addition to a statewide sales tax. But most of these states, unlike Colorado, have some type of process in place to simplify things for retailers and remain compliant with Wayfair.

For example, 23 states are members of the Streamlined Sales and Use Tax Agreement. That agreement, among other things, means local taxes and out-of-state vendor registrations are centrally collected by a state revenue agency. The states also make free software available to vendors to help them comply with the different sales tax rates.

It might make sense for all states who want to tax online sales without another legal challenge to simply join and comply with the steamlined sales tax agreement. But, says attorney Brian Kirkell, who is a state and local tax expert at the firm RSM, that approach could backfire. “These [streamlined] committees meet regularly and recommended changes,” he says. “The more states that join that haven’t been members in past, the higher the likelihood that there’s going to be substantial recommended changes that could bog down streamlined for years.”

Kirkell says the nearly two dozen states that have yet to move forward with any kind of online taxing proposal may be waiting until they have worked out all the kinks and are sure they are in compliance with the high court's ruling. “You’re still definitely seeing this attitude of, ‘We’d rather miss out on six months of a tax than have to go back and fix something,’” Kirkell says.


In other public finance news:

3 Lessons for Munis From the Financial Crisis

This week marks the 10th anniversary of the Lehman Brothers collapse and the global financial crisis that ensued. To mark the occasion, PNC Bank’s Tom Kozlik took a look back in his month analysis at what state and local governments have learned in the new era of austerity and accountability. Here are some of the highlights:

What goes up might come down. As U.S. home prices rose faster than incomes in the early to mid-2000s, many governments increased their spending to match the revenue stream. After the bubble burst, some regions saw housing-related revenue declines of close to 50 percent. While many places have normalized and been able to make adjustments, some still face a structural imbalance because some of their previous decisions on expenses – namely pension benefits – are unalterable.

Federal programs saved the day. Despite its many criticisms, Kozlik says, the $1 trillion American Recovery and Reinvestment Act of 2009 “should be considered by those in state and local government as a resounding success" because it softened the blow of falling revenues. Included in that program were the partially subsidized Build America Bonds program, which helped introduce new investors into the municipal market. The swift implementation of these stimulus programs, along with the Federal Reserve dropping interest rates to zero, says Kozlik, avoided an all-out financial collapse.

Do your own due diligence. The relative lack of warning from credit rating agencies on the impending collapse of public- and private-sector entities showed investors that the rating agencies aren’t perfect. While bond defaults and municipal bankruptcies still remained rare, the financial crisis forever changed the relationship between investors and governments. Now, it’s vital for municipals to be accessible to investors and maintain up-to-date financial disclosures if they want to get the best rates possible on their bonds.

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Liz Farmer is a former GOVERNING fiscal policy writer.
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