Government

Most states including Iowa hope for digital payday

Many other states rush tax laws in time for holiday shopping

Amazon.com worker David Brendoff, left, moves boxes with merchandise for shipment Tuesday, Dec. 13, 2005, at the Amazon.com fulfillment center in Fernley, Nevada. With the holidays just around the corner, many shoppers are relying on online sites like Amazon.com to complete their shopping. This facility, over 800,000 sq. ft., or roughly 13 football fields, is capable of handling hundreds of thousands of orders per day. (AP Photo/Ben Margot)
Amazon.com worker David Brendoff, left, moves boxes with merchandise for shipment Tuesday, Dec. 13, 2005, at the Amazon.com fulfillment center in Fernley, Nevada. With the holidays just around the corner, many shoppers are relying on online sites like Amazon.com to complete their shopping. This facility, over 800,000 sq. ft., or roughly 13 football fields, is capable of handling hundreds of thousands of orders per day. (AP Photo/Ben Margot)

Illinois, the state with the nation’s lowest credit rating, often is chastised for using gimmicks to balance its budget.

But it is hardly alone in its wishes to cash in on collecting more sales taxes from online purchases. It’s counting on $150 million more this fiscal year alone.

At least 32 states including Iowa have passed or are soon expected to pass laws requiring online sellers to collect and remit sales taxes even if they don’t have a physical presence in those states. About 20 have laws that would cover online shopping during this holiday season.

But tax analysts, lawyers and policymakers say these new laws might not give states what they are banking on. States are devising different plans with varying legal and procedural elements — some of them being rushed out before they are ready — leaving them open to lawsuits.

“We’re in a state of tremendous uncertainty about how these laws will proceed,” said Andrew Moylan, executive vice president of the National Taxpayers Union Foundation.

Supporters of Iowa’s tax code rewrite, signed into law earlier this year after a party-line vote, are careful not to call the new digital tax an increase. Rather, Republican Gov. Kim Reynolds calls it a plan that protects Main Street.

Under the law that takes effect Jan. 1, online retailers who make sales in Iowa will be required to collect and remit sales taxes. In addition, the law imposes sales taxes on purchases of digital books, ring tones, electronic games and entertainment, ride-hailing services like Uber, online travel sites and subscription services including streaming video like Netflix. Reynolds has said that any increased revenue from the digital sales tax will go to provide state income tax relief.

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Though Iowa passed it tax rewrite earlier, some states have been emboldened by a U.S. Supreme Court ruling in June in a case that pitted South Dakota against Wayfair, Newegg and Overstock.

The decision allowed states to expand the collection of sales taxes on goods and services bought online.

At least three other states already have joined Illinois in including this untested source of money in their current fiscal 2019 budgets.

On average, Illinois, Michigan and New Jersey — another fiscally troubled state — include $188 million of new remote sales tax revenue in their current budgets, Reuters found. Vermont has included $4.5 million of the new revenue in its current spending plan.

State and local governments could have gained $8.5 to $13.4 billion collectively in 2017 if they had the taxing authority, the U.S. Government Accountability Office said in November 2017.

But that windfall is proving to be slower and more confusing than expected, with unanswered questions that could leave some open to litigation over their rushed or unique programs.

A MESSY SCENE

In the Wayfair case, the court found that South Dakota’s program to collect remote sales taxes did not burden retailers. The ruling negated the previous prevailing standard: that a company must have a physical presence in a state in order for it to be required to collect and remit sales taxes.

South Dakota’s program says any company with at least $100,000 in sales or 200 unique transactions in a state qualifies as having an “economic nexus” there and must collect the tax.

To be sure, some big online retailers like Amazon already were remitting these taxes in some states including Iowa.

But different states are adopting different standards and procedures.

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For instance, it is unclear if some states will try to collect retroactively or require online marketplaces like eBay — which provide sellers with a platform — to collect the sales taxes.

READY TO ROLL?

Chief among problematic states is Louisiana, which currently collects its own sales taxes, as do many of the state’s 63 parishes. Its tangled system has 370 different taxing jurisdictions. And while the state does not tax certain goods — like prescription drugs — some parishes do.

The state is trying to create a single entity to serve as collector of remote sales taxes. But even officials there say they expect lawsuits.

“We’re not a square peg that fits neatly into a square hole,” said Louisiana Revenue Secretary Kimberly Robinson.

On the opposite end of the spectrum is Florida, which has not yet done anything substantive to expand — even though it should arguably be first in line because it has no state income tax.

“Legislators said it looks too much like a tax increase,” said Kurt Wenner, a vice president for Florida TaxWatch.

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