Supreme Court’s sales tax ruling could boost Washington budget

OLYMPIA – Washington could collect hundreds of millions of dollars a year in extra tax revenue from a new Supreme Court ruling that says online shoppers owe their state sales tax even if they buy from a company in another state.

Just how much is unclear, said state officials who are still studying Thursday’s 5-4 ruling that overturned existing case law on collecting sales tax from online purchases from out-of-state merchants.

“It’s good news. It’ll take a while for some of the money to start showing up,” David Schumacher, the director of the state’s Office of Financial Management, said. “It’s not earth-changing. But it’s not chump change.”

Washington, which relies heavily on sales tax for state programs and salaries, has tried for years to collect the taxes on the increasing volume of goods purchased online from merchants outside its borders.

So-called brick-and-mortar stores in Washington that were losing business to online competitors said they were at a disadvantage because customers could avoid state and local sales taxes, which range in various locations from 8.5 percent to 10.4 percent.

The Legislature passed a series of laws to try to capture some of that money, including a provision in last year’s tax compromise bill. That law requires so-called remote sellers who have more than $10,000 in sales with Washington customers to do one of two things. They can either voluntarily collect a “use tax” from the customer, which is equal to the sales tax, and send it to the state; or they could notify the Washington Department of Revenue of the buyer so the state can try to collect it.

Estimates prepared for that bill projected it could collect as much as $350 million in additional tax revenue for the state in a two-year budget cycle. But the law only took effect on Jan. 1, so while some money is coming in, it’s too early to calculate what the state will collect, said Anna Gill, of the state Department of Revenue.

Online merchants who don’t collect the tax, but opt to notify the state of their sales to Washington customers, must report annually and have until next spring for their first report, Gill said.

Hampering the efforts of Washington and many other states to collect tax from online vendors outside their borders has been a 1992 U.S. Supreme Court ruling that businesses with no physical presence in a state can’t be required to collect and remit taxes on goods shipped to that state.

In South Dakota, the loss in sales tax to internet retailers caused that state to pass a law requiring out-of-state merchants with a certain level of sales in the state to collect the South Dakota sales tax and send it in. It later sued Wayfair, Overstock.com and Newegg, which had no buildings or employees in the state, for refusing to collect the tax because of that 1992 decision.

Washington was one of 41 states and the District of Columbia that joined the case supporting South Dakota.

On Thursday, Justice Anthony Kennedy wrote for the court’s majority that 1992 decision is outdated, distorts markets and unfairly shifts the tax burden to the businesses that do collect those sales taxes. The requirement that a store have a physical presence in the state to be required to collect the taxes has become unworkable, he said.

In 1992, the court “did not have before it the present realities of the interstate marketplace, where the Internet’s prevalence and power have changed the dynamics of the national economy,” Kennedy wrote. States can require online merchants located beyond their borders to collect sales tax, under some circumstances.

Washington officials will have to study the ruling to see if there’s a way to change the current law, Schumacher said. “We have a very technical, complicated and convoluted system,” he said.

Sen. John Braun, R-Centralia, said some large online retailers like Amazon are voluntarily collecting the tax and remitting it to the state under the 2017 law, which was designed to get the same result for the state as Thursday’s decision points to.

“It confirms we were on the right path,” said Braun, who was chairman of the Senate Ways and Means Committee when that bill was written. Lawmakers will have a chance to see more complete revenue reports before deciding whether to try simplifying the system in the 2019 session, he said.

But whether they decide to rewrite the tax law or the court ruling just prompts more online retailers to voluntarily comply with the current law, the Washington budget could get a boost of hundreds of millions of dollars in each two-year fiscal cycle, Schumacher said. The court’s ruling follows a revenue forecast earlier this week that calls for some $300 million above previous projections through the end of next June, and $287 million extra for the 2019-21 budget cycle.

“If we keep getting good news like this, we won’t have anything to worry about,” Schumacher said, pointing to demands on state programs.

“It would be a great opportunity for us to put away some money for future downturns,” Braun said.