State should keep increased taxes on sales via internet
Economic conservatives, in and out of the Legislature, want to see a significant tax cut enacted this legislative session.
More precisely, they want to see what they regard as inadvertent tax increases enacted last year offset.
At least with respect to increased collections from internet sales, they are viewing the issue incorrectly.
In 2018, the U.S. Supreme Court’s Wayfair decision greatly expanded the ability of states to collect sales taxes from internet retailers.
Previously, a retailer had to have some sort of physical presence in a state for the state to impose a sales tax on it. In Wayfair, the court expanded that to include a volume of sales in the state.
Last session, the Legislature changed Arizona’s sales tax law to take advantage
of the Wayfair change. That obviously would increase what the state collected in sales taxes. Conforming Arizona’s income tax code to the Trump reforms at the federal level also would have produced a windfall for the state.
So, legislators enacted a package of reforms that include Wayfair taxation and income tax conformity. But sought to offset the increases by slightly reducing income tax rates and increasing the standard deduction, among other measures. The intent was to be revenue neutral, or not generate any more dough to the state than the old sales and income tax laws would have produced.
Democrats and liberals have decried this as a large tax cut. That’s not really the case. It was an attempt to avoid a tax increase compared to the status quo.
However, the Wayfair change is on track to produce far more additional sales tax revenue than originally projected. In terms of the state’s general fund, the Arizona Free Enterprise Club estimates that actual collections will exceed the projection by roughly $65 million in this fiscal year. It wants legislators to enact additional offsets.
But here’s the flaw in the logic. This is money that was owed the state all along. It just wasn’t being collected.
In addition to the sales tax imposed on and collected from retailers, Arizona all along had what’s known as a use tax. Those purchasing items on the internet but using them in Arizona owed the state the equivalent in use taxes to what would have been collected in sales taxes if purchased from a brick-and-mortar in-state retailer.
Now, understandably, there has been little compliance with this use tax obligation. Most people don’t know about it. Vanishingly few individuals kept track of their untaxed internet purchases and remitted the owed use tax. What little use tax the state collected came principally from businesses with sophisticated tax record-keeping systems.
However, state policy was that the tax was owed on internet purchases. The Wayfair legislation didn’t really change the policy. It just markedly increased compliance by shifting responsibility for collecting and remitting the tax from the purchaser to the seller.
Greater collections from improved compliance shouldn’t be regarded as a tax increase. Yes, people are paying more. But if the state hired more tax auditors who produced more revenue for the state by increasing compliance with existing policies, that also would mean that people were paying more. But no one would describe that as a tax hike.
Economic conservatives are on firmer ground, although with considerably less precision, regarding income tax collections as a result of conformity.
Income tax collections are also greatly exceeding projections. But it’s impossible to separate out the extent to which this results from underestimating the gains from conformity, as opposed to just the economy growing faster than expected.
Unlike taxing internet sales, any increased income tax collections from conformity is fairly described as a tax hike. The club guesstimates the hike could be the $120 million a year range.
There would be some validity in the argument that conformity has produced a larger than expected income tax windfall for the state that should be further offset. But increased sales tax collections on internet purchases? The state should keep and spend those.