Internet Sales Tax Ruling Seen Boosting States

The Supreme Court decision “should provide a welcome incremental addition to state coffers" over the long term, S&P says.
Matthew HellerJune 22, 2018

The U.S. Supreme Court decision allowing states to force online retailers to collect sales taxes may not lead to immediate credit rating upgrades for states but should provide a welcome financial boost over the long term, according to S&P Global ratings.

The court on Thursday revived a South Dakota law that requires retailers with more than $100,000 in annual sales in the state to pay a 4.5% tax on purchases. Forty-five states impose sales taxes and 35 of those supported South Dakota’s position in the litigation.

“We expect most states that impose retail sales tax to enact new legislation that require[s] at least large out-of-state online retailers to collect sales tax at time of sale,” S&P said in a news release. “This should provide a welcome incremental addition to state coffers.”

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The Supreme Court’s ruling “will help stem state tax erosion in a changing economic environment,” the rating agency said, noting that e-commerce grew 15.9% last year, while brick-and-mortar retail sales increased only 3.4%.

“States struggling with rising health care and pension costs will welcome the additional tax revenue, which in effect represents revenue otherwise lost from brick-and-mortar stores,” S&P added.

According to a recent report from the Government Accountability Office, state and local governments could have collected up to $13 billion more in 2017 if they had been allowed to require sales tax payments from online merchants and other remote sellers.

But S&P also said it does not “anticipate any immediate rating changes because of the court’s decision. It will take time to pass implementing legislation, and the additional revenue will represent a relatively small portion of overall state and local revenues.”

E-commerce retail sales accounted for only 8.9% of national retail sales in 2017, and sales taxes are generally not a majority of states’ general fund revenue. Amazon, which accounts for more than 40% of online retail sales, already collects sales taxes on direct purchases from its site.