Last year, the Washington state legislature approved a law mandating that online retailers without a physical location in the state either remit or collect the state sales tax normally paid by Washington consumers, starting this year. The bill was approved as part of the 2017-19 biennial budget, though its legality was questioned due to a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota. However, a new high court ruling has overturned Quill, allowing Washington and other states to collect the sales tax revenue with certain guidelines.
“This whole issue was never about a new tax,” Washington Policy Center Government Reform Director Jason Mercier said. “It was about ‘Can a state force a compliance and potential audit burden on an out-of-state company for the tax liability of a consumer in that tax?’ The ruling says ‘Yes you can…with certain safeguards.’”
For the Washington Retail Association, the ruling represents a step toward creating a level playing field between online retailers and brick-and-mortar businesses.
“It’s going to revitalize a lot of stores that have been losing considerable market share,” Vice President of Government Affairs Mark Johnson said. “You can buy anything on the internet now. We think this is a matter of fairness and open competition.”
In agreement is the National Retail Federation, which argued in a brief filed with the high court that the “tax advantages of absentee retailing are driving all kinds of businesses away from local communities.”
Writing for the majority opinion in South Dakota v. Wayfair, Justice Anthony Kennedy argued that South Dakota’s online sales tax law was not a burden to interstate commerce because of certain provisions that included:
- A “safe harbor” clause for out-of-state businesses with very limited activity in the state;
- No obligation to retroactively remit the sales tax; and
- Adoption of the Streamlined Sales and Use Tax Agreement system creating a single, state-level tax administration, including software that if used makes businesses immune from audit.
The ruling appears to heed the recommendations made in a brief filed with the court by the Tax Foundation that South Dakota’s law be upheld “without eviscerating the Constitution’s limits on state tax power.”
For Washington state, it could mean millions in new state revenue. Patti Wilson is the Marketplace Fairness project manager with the Washington State Department of Revenue, which is tasked with implementing the 2017 state law. She told Lens that the agency is still trying to determine who the new taxpayers are and how much revenue they expect to collect this year.
“We have been working with retailers to get them into compliance with either doing voluntarily collecting of retail sales tax or notice and reporting,” she said. “The presumption is they aren’t collecting, they’re reporting (the sales tax).”
In a statement, Senate Ways and Means Committee chair Sen. Christine Rolfes (D-23) wrote that the ruling “affirms the bipartisan decision the Legislature made in 2017 and will help level the playing field for our small brick and mortar stores across the state as they face increasing competition with large, out-of-state retailers.”
She added: “As we plan for the 2019 legislative session, we now have an opportunity to further modernize our sales tax collections. Our state was ahead of the curve and, as a result, the effect of this ruling will likely be minimal on Washington consumers, but will undoubtedly be a net positive for state and local government revenue collections. As we learn more about the impact of the ruling, it is likely that follow-up legislation will be necessary in 2019.”
Mercier said that one indirect consequence of ruling is that it might take some wind out of any potential effort next session to enact some form of an income tax. One argument for it “was that we need an income tax because we weren’t getting our sales tax (revenue),” he said.
“The question is what do they (the legislature) want to do next?” he added. “(Do they) just copy and paste South Dakota’s law, or do they want to get a little creative? It just depends upon which contingent prevails in the budget talks.”
In the meantime, Johnson said customers will benefit from increased competition between the online and physical retailers. “If they’re (online retailers) going to continue growing and gaining market share and expanding their operations, they’re going to have to think of ways to make up for that 10 percent (sales tax) differential.” Brick-and-mortar stores will still “have to think of ways to keep, attract and retain their market share. Competition is healthy. If you can’t compete and stay relevant and continue to evolve with the ways customers want to shop, you’re going to become obsolete and not do business anymore.”