Supreme Court decision in South Dakota v. Wayfair Opportunity to Improve State Revenue and Tax Fairness

June 26, 2018

In ruling on  South Dakota v. Wayfair, the U.S. Supreme Court overturned 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 taxes or in Arizona’s case a Transaction Privilege Tax (TPT).

The 5-4 decision written by Justice Anthony Kennedy and joined by Justices Gorsuch, Thomas, Alito, and Ginsberg, Kennedy emphasized how the world of commerce had changed significantly.  Mail order sales were $180 million in 1992, while e-commerce now reaches $450 billion.

As most online customers may note, the portion of online retailers collecting state sales taxes or TPT has been rising.  Based on an agreement with the state, 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.

This past legislative session, the Arizona legislature considered bills that would have limited taxation of e-commerce.  Those bills did not become law.  GCI had recommended no action be taken until the Supreme Court ruled on this case.  Now Arizona has an opportunity to improve state revenue without raising taxes, while making sure out of state businesses do not undercut local business by evading taxes.

In November 2017 the Government Accounting Office (GAO) estimated that state and local governments nationwide had lost between $8.5 and $13.4 billion.

However, in order to capture these losses, states would need to change their physical presence laws.

When a seller is deemed to have a physical presence, the seller must collect TPT (sales tax) for sales to made to purchasers in the state.  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 department of revenue—though in some states it is a combination (see South Dakota Supreme Court petition, p.11).

Arizona will now 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.    South Dakota’s law requires that sales tax be collected if sales in the state exceeded $100,000 or 200 transaction.  The federal district court will now try and define a bright line if there is a lower threshold or other considerations that states must take into account.

Arizona’s losses due to unpaid use tax 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, further expanding the TPT’s application to online sales would generate $80 million for the state General Fund, $96 million for county and local government, and $14 million via the Prop. 301 education sales tax.





GAO Estimate

Prop 301 Share to Education

Share to State General Fund

Portion to County and Local Governments






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