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From Quill to Wayfair, Midwest’s states at center of legal questions over
collection of taxes from remote sales

by Tim Anderson ~ May 2018 ~ Stateline Midwest »
In 2017, because they lacked the authority to require the collection of sales taxes on remote sales, states and local governments lost up to $13 billion. With one Midwestern state leading the way, this legal and fiscal landscape could change soon, depending on how the U.S. Supreme Court rules in South Dakota v.
For now, a 1992 decision, Quill Corp. v. North Dakota, is the law of the land. It says that, minus congressional action, a state can only require businesses with a substantial presence, or nexus, to collect and remit the sales tax. That ruling has affected not only state tax bases, but the competitiveness of Main Street businesses as well — particularly with the rise of electronic commerce (see line graph).
Four years ago, The Council of State Governments, in partnership with the State and Local Legal Center and members of the Big Seven organizations representing state and local governments, filed an amicus brief critiquing Quill, which prompted Justice Anthony Kennedy to ask for a case to overturn the ruling.
“If the Supreme Court wanted to leave the Quill rule in place, it probably would have simply refused to hear South Dakota v. Wayfair,” says Lisa Soronen, the center’s executive director.
Justices heard oral arguments in the case in April.
If states do get this expanded authority, it’s unclear exactly how much more they will collect in sales taxes; studies trying to estimate the impact have reached very different conclusions. Late last year, the U.S. Government Accountability Office pegged the increase as being somewhere between $8 billion and $13 billion a year (see table for state-specific figures for Midwest); that equates to between 2 percent and 4 percent of total state and local revenue collected via the sales tax.
While the rise of internet sales since Quill is well known, the work of states in creating a simpler, more uniform system of sales tax collection has received less attention.
But for nearly two decades, states have worked with one another and businesses on developing, implementing and fine-tuning the Streamlined Sales Tax Agreement. Twenty-three U.S. states (including all but Illinois in the Midwest) are currently full members of this agreement, which took effect in 2005.
“It represents a thoughtful, carefully worked-out compromise where all the parties involved looked at the undue burdens [related to sales tax collection], worked with the business community to identify them, and then found solutions,” says Craig Johnson, executive director of the Streamlined Sales Tax Governing Board.
Does requiring remote sellers to collect sales taxes place an undue burden on interstate commerce?
That is a fundamental question before the Supreme Court, and in his argument for overturning Quill, South Dakota Attorney General Marty Jackley points to the Streamlined Sales Tax Agreement — and his state’s membership in it — as evidence of today’s more uniform, simpler compliance system.
In Wayfair, the court will determine the constitutionality of South Dakota’s SB 106. Passed two years ago, it requires most retailers without a physical presence in the state to remit the state’s sales tax. The law applies to sellers with 200 or more annual transactions in South Dakota or whose gross revenue from sales in the state exceed $100,000.


Modifications to sales tax part of big changes made by Iowa legislators in 2018

by Tim Anderson ~ May 2018 ~ Stateline Midwest »

As in most years, many proposals to change state tax systems have been introduced and debated during the Midwest’s 2018 legislative sessions, but as of early May, only one major restructuring plan had become law.
Iowa’s SF 2417, passed by the Legislature in early May, cuts rates in each of the state’s nine income tax brackets. These modifications take effect in tax year 2019, and a more far-reaching overhaul could occur four years later — a reduction in the number of tax brackets from nine to four and a drop in the top rate (for incomes $75,001 and higher) to 6.5 percent.
Two revenue targets, however, would have to be reached to trigger these changes in tax year 2023: growth of 4 percent in the state general fund between fiscal years 2021 and 2022, and total general fund revenues of $8.3 billion in FY 2022.
SF 2417 also conforms with recent changes in the federal tax code; reduces corporate income tax rates (starting in tax year 2021); prepares the state to collect more revenue from remote sales (pending a decision in Wayfair; see story to the right); and expands the sales tax base to include economic activity related to digital goods, ride sharing and subscription services.
In FY 2019, these changes will result in a net reduction of $100 million in state revenue, the Iowa Legislative Fiscal Bureau estimates. That figure could rise to $642 million by FY 2024.
In Nebraska, various proposals to provide property and/or income tax relief failed to garner enough support, and in Kansas, legislators adjourned without passing a proposal to raise the standard deduction for income-tax payers.
As of early May, competing proposals in Minnesota were being considered to cut income taxes. Earlier this year, Wisconsin lawmakers passed SB 798, which provides a $100-per-child rebate to families and creates a back-to-school sales tax holiday from Aug. 1-5. During that time, the sales tax will not apply to clothing and school supplies sold for $75 or less, computer supplies that cost $250 or less, and computers with a price tag of $750 or less. According to the Federation of Tax Administrators, two other Midwestern states will have sales tax holidays this year: Iowa and Ohio.