Tax ruling may not be bonanza some envision

AU.S. Supreme Court decision allowing states to require out-of-state businesses to collect taxes on goods sold over the internet has visions of tax dollars dancing in politicians’ heads, including in Oklahoma.

However, the potential tax gains may be far lower than hoped. And if legislators aren't careful, their pursuit of those collections may do more economic harm than good.

For decades, businesses with no physical presence in a state could not be required to collect state and local sales taxes on goods sold to customers in that state via catalog or online sales. Tax payment was instead required of the customer. But few customers bothered to report and pay those taxes.

Last week, the Supreme Court overturned its past rulings. Oklahoma now has the green light to require any business, anywhere in the United States, that sells a product to an Oklahoma customer to collect all local and state taxes. And other states have the right to impose the same requirement on Oklahoma businesses selling goods in other states via online transactions.

Oklahoma’s state sales tax rate is 4.5 percent, and the combined state-local sales tax rate can run as high as 11.5 percent. Citing estimates that Oklahomans spend nearly $3 billion online each year, some have suggested the court ruling means state government will receive another $160 million annually while cities and counties will receive another $136 million.

Yet those estimates are based on the idea state and local governments are collecting almost no taxes off online sales. This is false.

As Chief Justice John Roberts noted in his dissent, “States and local governments are already able to collect approximately 80 percent of the tax revenue that would be available if there were no physical-presence rule.”

Roberts adds, “Among the top 100 Internet retailers that rate is between 87 and 96 percent.” The latter group includes Amazon, which represents 43.5 percent of online sales and already collects sales tax in Oklahoma.

Thus, uncollected taxes in Oklahoma may total $70 million (or less). And that $70 million will be divided among Oklahoma state and local governments.

This means the state’s share of online sales tax collections, facilitated by the court’s decision, may be far less than what the lottery generates annually. And the lottery’s impact on education funding has been so negligible it has gone unnoticed.

Rather than hammer big online companies, the ruling will have the greatest consequence for small businesses, such as individuals who have home-based businesses to generate supplemental family income. Those individuals will now be required to comply with nearly 10,000 state and local sales tax jurisdictions — which have widely divergent rules regarding what is taxable and what is not.

Compliance costs for those small businesses are poised to surge, which will deter business activity and therefore impede economic growth.

Some argue states can exempt small businesses. But if much of the 20 percent in uncollected online sales tax involves small sellers, any exemption further reduces state-and-local online tax collections.

Politicians are hailing the court’s online sales tax ruling as a pain-free way to increase government spending. The reality may prove very different.