This ruling will be good for Texas.
Texas stands to gain hundreds of millions of dollars in tax revenue after the U.S. Supreme Court on Thursday ruled that states may force online retailers to collect sales tax even when they have no physical presence in the state.
Every year, Texas loses $1.1 billion in uncollected sales tax, according to the Texas comptroller’s office — well over the $800 million the state will spend securing its southern border this year and next. That’s the result of the high court’s 1992 decision, now reversed, that retailers are responsible for collecting sales tax only in states where they had “nexus.” That decision — which predated the astronomical rise of the internet and the subsequent boom in online shopping — was outdated, argued lawyers for the state of South Dakota, who won the case this week.
That lost tax revenue is particularly meaningful in Texas, one of just a handful of states without a personal income tax. This May, for example, the state’s sales tax revenue totaled $2.76 billion.
Customers themselves owe sales tax on their purchases, but it’s sellers who are required to collect that money and send it to the government. States have little mechanism — and little incentive — to chase down sales tax on small-ticket purchases from average consumers when the retailers don’t do it themselves. Some of Texas’ largest online retailers — Amazon, for example — already remit sales tax to the state. Amazon has almost a dozen distribution centers in the state.
Texas is highly unlikely to gain back all of the $1.1 billion it’s currently losing, experts said, and any money the state gets back won’t come overnight. While the Texas comptroller has a great deal of taxing authority, some changes to the state’s tax structure might have to be carried out by the Legislature when it reconvenes in 2019, said Dale Craymer, the president of the Texas Taxpayers and Research Association. The Comptroller’s office is looking into that, a spokesman said.
“We welcome the court’s ruling in this case and are currently assessing any potential revenue impacts,” said Kevin Lyons, a spokesman for the agency.
I have long believed that the sales tax exemption for online purchases outlived its purpose years ago. This is not just for states like Texas but also for local governments that rely on sales tax revenue, and for traditional retailers who are no longer at an automatic disadvantage. Sales tax rates vary by locality, and not all items are subject to sales taxes, so this will be a challenge to set up, but that’s not our problem. Online retailers will figure it out, and life will go on. This was the right decision.