Back in 2008, when I first read about states wanting to tax online sales that were shipped into their state, I predicted that they would eventually win and that they would not stop fighting until they won. In my mind, the reason for this was simple; States were losing billions in tax revenue to online eCommerce. According to a 2009 report by the University of Tennessee, each year, states were losing $23 billion in state and local revenue to e-commerce sales and that this number would continue to increase annually. This was never about creating or keeping local jobs or balancing the playing field between brick and mortar and eCommerce stores; this was about maintaining State coffers so that they didn’t have to increase other taxes.
As an example, in 2016 according to the U.S. Census Bureau, 84.2% of South Dakota’s total tax revenue came from Sales and gross receipts. Nearby states total sales tax revenues ranged from 40.2% to 46.2%. Clearly many states, not all but many, rely on Sales Tax to keep their states running. In 2017 South Dakota increased Sales Tax by 0.5 percent, it was anticipated that this change would increase sales tax revenue by 16.9 percent, but in fact, sales tax revenues have gone up only 9.4 percent. Clearly, South Dakota sees this as being a direct result of people moving from in-state brick and mortar purchases to online purchases. I think that the Government of South Dakota realizes that the Supreme Court ruling that allows them to tax sales delivered into their state will not save brick and mortar jobs in their state; it will, however, allow them to maintain and grow their sales tax revenue base.
This new tax burden will also not destroy online sales as small businesses were exempt for the most part, and the level of automation afforded to larger businesses due to e-commerce automation already gives them a cost advantage over brick and mortar. I have had customers tell me that they save $52.00 per order. On 1,200 0rders per month that works out to a savings of about $750,000 per year. Another customer said that, due to e-commerce automation, they were able to handle 2,400 orders per day with a single employee. So, for these companies, a tax service to automate the collection of sales taxes based on the customer’s ship-to address would be a small cost by comparison to the savings they have over a brick and mortar operation. In conclusion;
· Online sales are not going away.
· The need of many states for sales tax revenue to balance their budgets is not going away. However,
· Brick and Mortar businesses are diminishing and will likely continue to diminish.
Therefore, in my opinion, States that rely heavily on Sales Tax for state revenue have little or no choice but to fight for the ability to add sales tax to all sales made within their jurisdiction. However, this brings to the fore a bigger question. What happens when eCommerce companies set up shop outside of the U.S.? Does a State have the right to force a non-U.S. company to collect taxes for sales delivered to their state? This will be the next big legal battle.