The Internet Sales Tax “Windfall”: How Will States Respond?

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For some time, the issue of online retailers collecting a sales tax has been a contentious one. The basic premise is that the web-based retailer would collect the tax, and then distribute it to the appropriate state based upon the destination of the order. It is estimated that in 2012 there were $225.5 billion dollars in sales generated online and $23 billion in uncollected taxes. Needless to say, this is a boon for buyers (and the sites that attract those buyers’ dollars) but a real bust for the states, many of which are in desperate need of that extra money for budgetary purposes.

While there is mixed support from online retailers, the main hurdle for implementing an online sales tax has always been the mechanics of it. Naysayers cite the fact that of the 45 states that currently have a sales tax, all have different sales tax rates, and different rates for different products. In many cases, there are variations within counties and cities as well. Online retailers see this as an administrative nightmare. Of course, they also see it as losing their competitive edge over brick-and-mortar stores, since many consumers head to the Internet to avoid paying a sales tax.

With all of the money at stake, states have pressured Congress to act. On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act. The act is intended to make it a smooth and equitable process for states to collect their piece of the pie. President Obama said he will sign the legislation, but there is still one significant hurdle: the conservative majority in the House may block its passage. Let’s assume for the moment that the bill makes it through the House and actually becomes a law. How responsible will the states be in using this windfall? After researching the various states and exploring their current fiscal conditions and mindsets, you could almost guess the answers.

After years of excess spending and supporting large entitlement programs, many states will undoubtedly use the money to try to plug shortfalls in their budgets. There will be no effort to eliminate anything – just attempts throw more money at it. Other states will dig the hole even deeper by using the money on more wasteful spending programs. But there are also several “stars” in this scenario. These are states that would use the money to improve their competitive standing on a national level. One such state, which has made headlines for taking tough and often unpopular steps to rein in spending and balance its budget, is the State of Wisconsin.

In the period from 1995 through 2010, Wisconsin lost more than $2.51 billion in outward wealth migration to states with more attractive tax structures. The largest winners in this shuffling of funds have been Texas and, to a greater extent, Florida. Neither of these states has any state income tax, and both also have other business-friendly policies. Wisconsin Governor Scott Walker wants to join those ranks, and he sees that one way to do it is by eliminating Wisconsin’s state income tax. The biggest challenge in getting legislation like this approved is to maintain revenue neutrality in the process. Generally speaking, this is done by raising taxes in other areas, such as increased sales tax rates, property taxes, etc. These steps are often strongly opposed for being unfair to the poor, and that line of argument usually stops the process in its tracks.

Governor Walker plans to take a far more responsible course in using the additional dollars. Should the online sales tax come to pass, he would use his estimated $95 million to help mitigate these concerns by reducing the negative impact. As a result, the governor may finally achieve his goal of eliminating the state income tax and making the State of Wisconsin a recipient of this migrating national wealth, rather than the victim of it.