As online commerce has grown into an ever-increasing share of the U.S. economy, Oklahoma and other states have struggled with the problem of lost tax revenue from untaxed sales. A major Supreme Court ruling this past June, combined with actions by the Oklahoma Legislature and major online retailers, will largely address the problem and generate a substantial boost in tax revenue for state and local governments. But there one final step Oklahoma should still take to prevent the loss of revenue and ensure an even playing field for brick-and-mortar retailers and their online competitors.
The challenge of taxing online sales
Under Oklahoma law, state and local taxes have always been owed on online purchases, regardless of whether the seller charges the tax. However, the US Supreme Court ruled in the 1992 Quill v. North Dakota decision that retailers lacking a physical presence in a state, or “nexus,” cannot be required to collect and remit taxes. This means that an online retailer like Target.com that has brick-and-mortar stores in Oklahoma collects tax on online purchases from Oklahomans, while other online retailers, like Overstock.com, do not. In practice, the ability to sell goods tax-free has created a significant competitive advantage for online retailers over the brick-and-mortar stores that provide jobs and support our local communities.
The unrelenting growth of online commerce over the last 20 years has meant that the revenue consequences of the barriers to collecting tax on remote sales are substantial. The federal GAO (Government Accountability Office) estimated that Oklahoma lost between $157 million and $228 million in unpaid use tax revenues from e-commerce in 2017.
For years, a coalition of businesses, cities, and state governments promoted federal legislation that would give states the authority to require out-of-state sellers to collect sales tax. Although the Marketplace Fairness Act passed the U.S. Senate with broad bipartisan support in 2013, it and other measures stalled in Congress. This inaction prompted states to take increasingly assertive steps to challenge Quill‘s restrictions on their ability to tax Internet sales.
The Wayfair decision
In June, the Supreme Court overturned the Quill precedent in South Dakota vs. Wayfair, Inc. In a 5-4 decision, the Court upheld a South Dakota law that required retailers to collect and remit tax on purchases even if the seller does not have a physical presence in the state, ruling that an economic presence should be the basis for taxing a sale.
In its decision, the majority identified several ways that South Dakota’s law avoided placing an undue and unconstitutional burden on interstate commerce. South Dakota is one of 23 states that is a full member of the Streamlined Sales Tax Agreement, which creates a simpler and more unified sales tax system for retailers selling across state lines. As an SSTA member, South Dakota pays for sales tax compliance software for non-physically present retailers. South Dakota’s law exempts remote sellers that make less than 200 separate sales or total sales of less than $100,000 into the state and does not impose any back-tax liability on Internet sellers without a physical presence in the state. South Dakota’s law can serve as a framework for other states crafting legislation that will pass legal muster.
Oklahoma’s efforts to tax online commerce
Since 2010, Oklahoma has enacted several laws aimed at increasing tax collections on Internet sales. In particular, a 2016 law broadened the definition of “maintaining a place of business in the state” to include out-of-state businesses that maintain various relationships with individuals or businesses located in Oklahoma. It also required online retailers to provide their customers an annual statement of their total purchases in the preceding year and to inform them that they owe taxes on these purchases
Earlier this year, in the midst of the teacher walkout, the Legislature went even further by passing HB 1019xx. The law, which anticipated the Supreme Court’s Wayfair decision, requires all persons who conduct remote sales through a website and who have total annual Oklahoma sales over $10,000 to choose either to collect sales tax directly or to notify their customers of their tax responsibility, even if the seller does not have a physical presence in Oklahoma. The new law applies to both marketplace facilitators like Amazon Marketplace that conduct transactions directly for third-party sellers and to referral websites like Ebay and Etsy that facilitate sales but do not directly process transactions.
[pullquote]“Oklahoma is one of only three states in which Etsy and Ebay are moving forward with collecting taxes.”[/pullquote]
Major online retailers have already moved to comply with HB 1019 by choosing to collect taxes on third-party sales. According to Ecommercebytes.com, Amazon Marketplace began collecting tax on Oklahoma third-party sales July 1st and Etsy followed suit August 1st. Ebay has indicated that it will collect tax on third-party transactions starting July 1, 2019. Oklahoma is one of only three states, along with Washington and Pennsylvania, in which Etsy and Ebay are moving forward with collecting taxes. Other marketplace facilitators and referrers are already collecting tax or are implementing the systems to do so, based on discussions with the Oklahoma Tax Commission.
HB 1019xx was officially projected to generate $19.5 million in additional use tax revenue in FY 2019 and $20.5 million in FY 2020. However, given the willingness of major marketplace sellers to collect tax on online sales in Oklahoma, the actual revenue boost may be substantially greater. For example, a recent study for the American Booksellers Association estimated Amazon’s third-party sales in Oklahoma at $800 million in 2016; if that full amount were taxed at the state sales tax rate of 4.5 percent, it would generate $36 million. As a sign of the impact that changes in online tax collections are having, Oklahoma City has reported that its use tax collections are up 50 percent in October and 63 percent in September compared to a year ago.
In light of the Wayfair decision, Oklahoma can and should go one final step by requiring all remote sellers to collect Oklahoma tax, rather than leaving them the choice of providing customers notification of their tax obligation. This would provide an even playing field for everyone. Since Oklahoma is already a full member of the Streamlined Sales Tax Agreement, and since HB 1019 and other laws did not impose back-tax liability on remote sellers, Oklahoma would only need to raise the exemption for small retailers from $10,000 to $100,000 to conform with the South Dakota law that the Supreme Court upheld in Wayfair. Raising the threshold to exempt would likely cost the state minimal revenue and would ease the compliance burden for small, independent retailers.