VOL. 42 | NO. 27 | Friday, July 6, 2018
Collecting online sales taxes no cure-all for state budget
Tennessee’s political officials are lauding the U.S. Supreme Court’s decision enabling states to effectively collect sales taxes from out-of-state online retailers.
But don’t expect the result of South Dakota v. Wayfair to be a watershed moment for the state budget. If you’re looking for a windfall to bolster education or house the homeless, close your eyes and dream on, because this likely isn’t about mo’ money, mo’ money.
The decision overturns a 1992 Quill decision restricting tax collections on retailers from other states. At that point, internet sales were only a spark on the horizon that slowly started burning into the bottom line of stores across the country.
“This decision will help ensure fairness for Tennessee businesses and will specifically help local businesses compete on an even tax playing field with out-of-state online companies. We are currently reviewing the court’s decision and are considering next steps and what this means for Tennessee,” says Gov. Bill Haslam in a statement.
Lt. Gov. Randy McNally is a little more specific.
“When internet commerce was new, it made sense to allow the new technology to thrive tax-free. Today, internet commerce is ubiquitous with many families purchasing large majorities of their goods and services online,” McNally says.
The Oak Ridge Republican – who could have used the words widespread or commonplace so the ignorant masses wouldn’t have to consult a dictionary – notes the outcome should give stores “with strong roots” a better chance to prosper equally with internet retailers. And, ultimately, this could boil down to helping stores with physical presence compete.
“I am committed, as are many of my colleagues, to ensuring any revenue windfall experienced by the state as a result of this decision is returned to the taxpayer in the form of tax cuts,” McNally adds.
Getting a handle
The state Department of Revenue issued a rule in January 2017 requiring retailers without a physical presence in Tennessee and with sales of more than $500,000 to register here and start collecting sales taxes. The department made collections optional because of a court challenge.
Even so, revenuers estimated Tennessee would collect only an additional $200 million a year when the rule took effect fully. To be sure, that amount of money is not insignificant. Yet, considering Tennessee has a $37 billion budget, it’s not going to make or break us.
Thus, legislative leaders such as Sen. Bo Watson say it’s too early to tell how the numbers will shake out in terms of setting a state budget.
Watson, chairman of the Senate Finance, Ways and Means Committee, considers the court’s decision a “great win for states’ rights,” amid a situation in which “the tax is adjusting to the changing economy due to technology.”
“I think we have some time, a year or two, to try and get a feel for what this actually means to Tennessee and really to every state in terms of remote tax collections. Ideally, you hope they would allow us to lower the rate and broaden the base relative to our tax policy,” says Watson, a Hixson Republican from the Chattanooga area.
He acknowledges that figure could go higher, and he uses the analogy of cell phones and 911 systems to make the point. After years of building 911 systems around land lines, governments had to revamp when those became obsolete and cell phones started taking over, he notes.
Watson predicts the state could hold on to the online tax collections instead of spending the money. Otherwise, it would be hard to pull back, he says, until state leaders get a better idea of how much money is coming in and how to manage it.
The state base is 7 percent, with 1 percent going into the state coffers and 6 percent shared with cities and counties. Local governments also can collect an additional 2.75 percent for themselves.
If money comes flowing in at a good clip, under one scenario, the state sales tax could come down to 6 percent with 1 percent going to the state and the other 5 percent being shared with city and county governments.
These are the questions, Watsons adds: “Have we looked at this with rose-colored glasses and think it’s going to be this huge amount of money and it’s really not? Or is it really a huge amount of money and may allow us to spread it out amongst more people.”
Factoring the local split
Watson and Rep. Charles Sargent, chairman of the House Finance, Ways and Means Committee, are on the leading edge of discussion about recalculating the percentage of share sales tax money city and county governments receive.
Sargent, a Franklin Republican who is leaving the Legislature and giving up a good deal of influence over money matters, points toward Williamson County as a good example of the imbalance in state-shared distribution.
The state sends 97 percent of state-shared dollars to cities, with 3 percent going to counties. Williamson County has 230,000 residents, 50,000 of whom live in unincorporated areas.
If the internet sales tax took effect, Sargent wants to make sure the split would be done correctly to ensure those 50,000 people get their “fair share” of the sales tax.
“The cities are trying to sit down now with the counties and with everyone else and say we understand there’s a situation, a problem, how do we solve this problem?” Sargent said in April at the end of the 2018 session as the 110th General Assembly recessed.
Lobbyists for the county people were more than ready to talk about the matter this spring.
The Tennessee Municipal League, on the other hand, wanted no part of public discussion.
But the TML better get ready for a debate.
In fact, Watson started floating the idea for re-evaluating sale tax shares two years ago because the state’s system is antiquated. When Tennessee moved away from a state property tax in 1947 to the sales tax, the system was set up to improve funding for K-12 education. Now that many cities have gotten out of the education business and are using their sales tax shares for non-education items, it’s time to revamp the system, he contends.
“That’s a complex conversation. You’re talking about a significant change in tax policy,” Watson says.
And it was nowhere near ready for discussion in 2018. Lawmakers were too torn up about fighting opioids, a laudable battle, and trying to make Memphis look bad for taking down a monument of Nathan Bedford Forrest.
One of the biggest concerns when legislators debated this matter a couple of years ago was that a Tennessee rule to start forcing out-of-state retailers to collect those taxes might work against businesses here.
With the court decision more or less changing the law nationwide, though, everyone will be happy as pigs in slop. Right?
Well, maybe not.
While online shopping is certainly convenient for many people, there are those who like to try on clothes and shoes, swing golf clubs and test-drive bicycles before they buy them. Otherwise, they waste time ordering them, trying them out and finally sending them back.
Take me as a prime example.
Last year, my sister ordered me a pair of shoes for Christmas. They looked great on the website. But after wearing them for about a week and tromping up and down the stairs at the Cordell Hull Building, I thought I was going to have to report to the doctor for foot surgery.
The same thing happened a few months later when I bought a pair of golf shoes. After 10 holes, I was cussing FootJoy.
Brick-and-mortar stores share some of the blame, too, because they’re scared to build up an inventory with a wide variety of products and shoe sizes.
The other problem is shoe makers quit making the kinds of shoes that fit my feet. And yet another problem is my feet are jacked up. But I digress, which leads to the final point.
Now that we could be on the verge of ironing out these sales tax collections, maybe manufacturers, online retailers and store owners will start making customers top priority.
Competition is good, because serving hard-to-please people like me should be No. 1 on your list.
Oh, yeah, and little tax break would be nice too.
Sam Stockard is a Nashville-based reporter covering the state Legislature for the Nashville Ledger, Memphis Daily News, Knoxville Ledger and Hamilton County Herald. He can be reached at firstname.lastname@example.org.