As the holiday shopping season approaches, more governments than ever will reap the benefits of all that spending. That’s because in 2018, the U.S. Supreme Court overturned the ban on governments taxing online sales. More than a year after the South Dakota v. Wayfair decision, states have now started collecting, and some have already seen a slight boost in sales tax revenue. That bump could be even greater as the Black Friday/Cyber Monday shop-a-thons kick off the end-of-year spending spree.
But it’s unlikely that cities will see much of it.
States saw a 7 percent bump in sales tax revenue between June and September of this year over the corresponding period in 2018, according to data compiled by the Urban Institute’s State and Local Finance Initiative. That’s a few percentage points higher than average, and the Institute’s Lucy Dadayan says it’s most likely due to the increased collections from online sales.
Locally, however, it’s a different story. In fact, some say that after taking retail downsizing and job losses into account, the arrival of online sales taxes will have a negative overall impact on city tax revenues.
On the local level, taxing online sales is much more complicated for businesses, mainly because they are dealing with thousands of local sales tax rates across the country. That means it’ll be many more months until full implementation down to the level of cities and towns is in effect. What’s more, few cities even have sales tax rates higher than 3 percent, meaning that it’ll be tough to point to any measurable bump from internet sales.
“They’re still adjusting to these new rules,” says Dadayan of businesses. “And even down the road, the impact on the local level is going to be less than the state level.”
However, there are seven cities with sales tax rates at or above 5 percent, and Dadayan says it’s possible those places could benefit. Among those that have recent financial data available, New Orleans cited a revenue bump in 2018 that included an $18.6 million increase in sales tax collections “in part because of greater remittance by remote sellers.” Recent financial data from Birmingham, Alabama, however, show no such impact.
Bradley Scott, the finance director of the jewelry supplier Halstead Bead, said his company’s taxable revenue is down this year because of the cost of compliance. As a result, Halstead, which employs 29 people in Prescott, Arizona, has downsized by at least four workers through attrition. Meanwhile, some warn that certain localities will ultimately be on the losing end of the ruling because complying with it might negatively impact local companies who do a lot of online sales. “Any taxable business we have is going to be outside of Arizona, so it’s really a net loss for our town, because our payroll and taxable revenue is lower,” he said.
Prescott, a central Arizona mountain town of about 43,000, has a reputation as a tourism destination, which supported healthy increases in sales tax revenue and double-digit growth in its hotel tax collections last year. However, the city is also home to at least a half-dozen major manufacturers in aerospace, bioscience, guns, and other products, many of whom are also adjusting to new sales tax laws.
The court’s ruling in South Dakota v. Wayfair, issued in June 2018, did away with the notion that governments can only collect sales taxes on purchases made from retailers with a physical presence in their state. In doing so, the court overturned two previous rulings that predated the world of e-commerce.
Within a year of the ruling, the District of Columbia and 42 of the 45 states with a sales tax had enacted laws or regulations requiring remote sellers to remit a sales tax. Since then, Kansas has enacted a remote seller law; Florida and Missouri are still debating legislation.
The ruling was generally a welcome one: The sales tax has captured an ever-shrinking portion of the U.S. economy in recent decades thanks to a general shift away from goods and towards non-taxable services. Governments supported it because they estimated they were missing out on anywhere from $13 billion annually to as much as $23 billion in lost sales tax revenue. Brick-and-mortar retailers have long said they were unfairly competing against online sellers and blamed the sales tax charges. “Main Street retailers currently operate at a 5-10 percent disadvantage,” the National League of Cities said in 2016, “because they are required to collect sales taxes while remote sellers are not.”
But the increasing growth of online shopping has revenue implications for local governments beyond just the sales tax. The slow fade of physical stores extends to income and property tax collections. The ongoing “retail meltdown” that spawned so many headlines in recent years only accelerated in 2019: Store closures in the first six months of the year have already exceeded the number of closures for all of 2018. The ability to now capture economic activity online won’t necessarily balance out those other losses, according to Tom Kozlik, head of municipal credit at Hilltop Securities. People will continue to shop, but downtown retail cores in cities won’t play as vital a role as they once did.
“I think it’s just not going to be as concentrated,” Kozlik said. “It’s revenue that’s going to be collected, it’s just not the area where was collected before.”