Wisconsin could generate as much as $187 million in new tax revenue annually if it extends its sales tax to online retailers based in other states — enough to give about $84,000 to every Wisconsin school or make permanent this year’s one-time $100-per-child tax credit and back-to-school sales tax holiday.
However, Gov. Scott Walker and Republican lawmakers have already signaled that additional funds from such taxation should be used for a different purpose: automatic reductions in state income tax rates.
At issue is a new frontier in tax collections made possible by the U.S. Supreme Court’s ruling in a South Dakota sales tax case that reverses a decision from 1992.
The 1992 ruling held that states can collect a sales tax only if a business had a substantial presence in the state — typically a brick-and-mortar retail location. Since then, e-commerce has exploded, with estimated sales last year reaching $848 billion nationwide.
On Thursday the Supreme Court’s 5-4 ruling, which did not split along ideological lines, overturned the 1992 decision and said states can tax internet sales.
The ruling doesn’t mean such a sales tax will begin immediately in Wisconsin as it will in many other states that have laws where the court decision automatically triggers a sales tax collection for online sales.
Walker’s office, the state Department of Revenue and the Legislative Fiscal Bureau are still reviewing the decision and declined to comment before completing the review.
So it’s unclear if new legislation is needed or whether the Walker administration can collect the tax from out-of-state companies through regulatory changes.
Walker and the Legislature enacted a law in 2013 requiring income tax rate cuts corresponding to any potential online sales tax revenue collections “as a result of any federal law to expand the state’s authority to require out-of-state retailers” to collect the tax. But that law doesn’t refer to U.S. Supreme Court decisions.
Wisconsin and other states try to collect revenue from online sales through an alternative method known as a “use tax.” Taxpayers are supposed to pay the tax through their annual state income tax form.
However, few filers report online purchases. According to a 2015 report on state sales tax collections prepared by the Minnesota legislature’s research department, only 3.1 percent of Wisconsin income tax filers paid the tax in 2012. The state revenue generated from the use tax that year was $4.9 million.
Online retailers based in Wisconsin are supposed to collect sales tax from Wisconsin buyers.
Details to follow
Exactly how states collect sales tax from online retailers is unclear.
One issue is how much in sales would need to be generated in order for an out-of-state company’s sales to be taxed.
Cory Fish, a lobbyist who studies tax issues for Wisconsin Manufacturers & Commerce, the state’s chamber of commerce, noted the South Dakota law upheld as constitutional doesn’t apply to out-of-state businesses with fewer than 200 transactions in the state, so that could be the minimum standard Wisconsin would have to follow.
One thing that is clear is that states are in line to receive a windfall of new sales tax revenue, generating $8.5 billion to $13 billion in tax revenue nationally, according to a November report from the U.S. Government Accountability Office. That represents between 2 and 4 percent of state sales tax collections.
In Wisconsin, the report estimates, the new revenue would total $123 million to $187 million a year.
Rep. John Macco, R-Ledgeview, chairman of the Assembly Ways and Means Committee, said state DOR officials told him the additional revenue could be about $160 million per year.
That’s about what a one-time child tax credit and back-to-school sales tax holiday is expected to cost this year, or how much the state recently received in federal funds to finish the Interstate 94 expansion project in southeast Wisconsin to accommodate the $10 billion Foxconn project, or almost twice as much as the state approved for school safety grants earlier this year.
But the provision Walker and Republicans tucked into the 2013-15 state budget could require the Department of Revenue to cut state income tax rates.
Macco said the Supreme Court ruling gives “a level playing field to folks that are coming into Wisconsin and really decimating our local businesses.”
The state should act quickly to begin collecting sales tax on online purchases from out-of-state retailers, Macco said. But he added it’s not yet clear if it could do so under existing law or if a new law is needed.
“It would be my intention that if we need legislation, we draft it right away,” Macco said.
The Legislature isn’t scheduled to convene again until next year after the fall election when half the Senate and all Assembly seats are on the ballot.
Macco said he was unaware of the 2013 budget provision — and it’s possible it won’t be relevant because there has been no change in federal law.
But Macco said if the state reaps additional tax revenue, he would like to see it used on income or property tax reduction.
Rep. Dale Kooyenga, R-Brookfield, who helped lead Assembly Republicans in crafting previous tax policy proposals, including the 2013 budget language, also said any new revenues should go toward cutting income tax rates. Kooyenga said he expects Walker agrees, based on his longstanding opposition to tax increases.
“This is really an opportunity for tax reform,” Kooyenga said.
Walker’s office declined to comment on how additional revenue should be used.
Macco and Kooyenga also said they oppose requiring very small businesses to collect and remit tax for online sales. Both said they favor setting a “high” threshold for the amount of online sales a business would make in Wisconsin before they would be required to start collecting sales tax.
“Our concern is this: to be no burden on small businesses, but to catch the big fish,” Macco said.
According to Fish, the WMC lobbyist, the business group sees applying the sales tax to online retailers as a way to level the playing field for brick-and-mortar retailers in the state, and would prefer additional revenue go toward other tax reduction.
Democrats suggest investments in state
Senate Democratic Leader Jennifer Shilling, D-La Crosse, said in a statement that tax treatment of online sales until now “has put Wisconsin retailers at a competitive disadvantage.” Shilling’s office didn’t immediately say how new online sales-tax revenue should be spent.
State Superintendent of Public Instruction Tony Evers, who is running for governor, said “one look at our roads, schools and cost of health care in Wisconsin and it’s easy to see where we need to make strong investments with any new additional revenue.”
Other Democratic candidates for governor had similar ideas for how to use the money.
Madison Mayor Paul Soglin issued a statement immediately after the ruling came out Thursday saying the state “should commit to earmarking all the resulting revenue to our public schools and a statewide high-speed internet system.”
Former Democratic Party chairman Matt Flynn said he would allocate the money to public education “in order to relieve the property tax.”