|April 16, 2018Dave Wells, Research Director
Grand Canyon InstituteFor more information, contact Dr. Wells:602-595-1025, Ext. 2, email@example.com
South Dakota v. Wayfair Likely Opportunity to Improve State Revenue
Tomorrow the U.S. Supreme Court will hear South Dakota v. Wayfair that challenges a 1992 Court decision (Quill v. North Dakota) that required businesses to have a physical presence in order to have a nexus for purposes of applying sales or in Arizona’s case a Transaction Privilege Tax (TPT).
The court is widely anticipated by June 30 to overturn Quill and expand the ability of states to tax internet transactions, creating a more even playing field between brick and mortar stores and those online.
As most online customers may note, the portion of online retailers collecting state sales taxes or TPT has been rising. Amazon has collected taxes on its direct sales (though not necessarily third party ones) in Arizona since 2013 and now does so nationwide in all states that have a sales tax.
In Arizona use taxes are still owned on transactions where TPT is not collected, but they are rarely paid by consumers, though business compliance in business to business sales is better.
The Government Accounting Office (GAO) in November 2017 estimated that state and local governments had lost between $8.5 and $13.4 billion.
However, in order to capture these losses, the state would need to change its physical presence law.
When a seller is deemed to have a physical presence, the seller must collect TPT (sales tax). The Arizona Department of Revenue currently attributes nexus to online sellers that have an affiliate presence through a related corporate entity that promotes or sells their product or a click-through nexus whereby a website in the states provides a click through to the remote seller. Most states have similar provisions but have done so through law rather than interpretation by their Dept. of Revenue—though in some states it is a combination (see South Dakota Supreme Court petition, p.11).
If South Dakota prevails, the state will likely be able to redefine nexus based on an amount of sales in the state, such as exceeding either $500,000 in sales or 25 percent of all sales. This would enable the state to force other out of state vendors to collect TPT as opposed to the voluntary and severely underpaid use tax. This step would follow the recommendation of the Multistate Tax Commission.
Arizona’s losses were estimated by the GAO to be between $190 and $293 million.
Because current interpretations by the Arizona Department of Revenue limit TPT losses and following the Multistate Tax Commission recommendation would exempt small businesses, GCI uses the lower GAO estimate and assumes an average overall state and local TPT rate of 8.2 percent, including the state TPT of 5 percent, which includes a distributive share to county and local governments, and the 0.6 percent educate-dedicated sales tax.
Under those assumptions, the state General Fund would gain $80 million, county and local government would gain $96 million and the Prop. 301 share would be $14 million.
|GAO Estimate||Prop 301 Share to Education||Share to State General Fund||Portion to County and Local Governments|
The Grand Canyon Institute, a 501(c) (3) nonprofit organization, is an independent, nonpartisan think tank led by a bipartisan group of former state lawmakers, economists, community leaders and academicians. The Grand Canyon Institute serves as an independent voice reflecting a pragmatic approach to addressing economic, fiscal, budgetary and taxation issues confronting Arizona.