This session has seen the Oklahoma Legislature take a couple of important steps towards addressing the problem of untaxed online sales. These bills and reforms from earlier sessions are moving Oklahoma closer to an even playing field when it comes to taxation of online purchases versus purchases in brick-and-mortar stores. But it’s an impending decision by the U.S. Supreme Court that offers the best hope for a real and lasting solution to the problem.
The challenge of taxing online sales
Oklahomans already legally owe state and local taxes for their 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 sales tax on online purchases from Oklahomans, while other online retailers, like Overstock.com, do not.
With the unrelenting growth of online commerce over the last 20 years, 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. As well as being a tax and budget concern, the ability to sell goods tax-free creates a significant competitive advantage for online retailers over the brick-and-mortar stores that provide jobs in our local communities.
For years, a coalition of businesses, cities, and state governments have 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 have stalled in Congress.
Oklahoma weighs in
Congress’ failure to act has prompted most states to pursue their own measures to collect tax from online commerce. In 2010, the Oklahoma Legislature approved an initial, tentative measure requiring remote sellers to disclose to their consumers that they may owe use tax on what they are buying despite the fact that the seller is not charging use tax. Then in 2016, the Legislature passed HB 2531, a more expansive measure that broadened the definition of “maintaining a place of business in the state” to include businesses that maintain various relationships with individuals or businesses located in Oklahoma. In addition, HB 2531 required retailers to provide their customers an annual statement of their total purchases in the preceding year and informing them that they owe taxes on these purchases.
Building on the new law, early last year Oklahoma announced an agreement with Amazon.com, under which the giant online retailer agreed to begin collecting tax on Oklahoma purchasers as of March 2017. Prior to this agreement, Oklahoma’s state and local governments had been losing an estimated $108 million to $122 million per year in untaxed sales by Amazon.
These efforts seem to be bearing fruit. Use tax collections rose by 11 percent in FY 2017 and are projected to grow by an additional 23 percent in FY 2018 and 13 percent in FY 2019. If these projections are met, use tax collections will have shot up by over 50 percent, or $110 million, in three years. By contrast, sales tax collections fell by 2.2 percent in FY 2017; by FY 2019, sales tax collections are projected to be up 19 percent over three years.
Now Oklahoma may go further and take two additional steps to increase collections from online sales:
- SB 337 has passed the full Senate and House committees and now awaits final action by the House. It would require retailers that do not collect use tax to share information about a customer’s annual purchases with the Oklahoma Tax Commission, in addition to sharing it with the customer. The provision would apply to out-of-state retailers with total annual Oklahoma sales of over $100,000; failure to comply with the disclosure requirement would lead to a fine of $10 per customer. The Oklahoma Tax Commission has not provided a fiscal estimate for the bill, although in committee, the bill’s author stated that the bill could generate $30 million. Oklahoma’s earlier bills also initially contained similar reporting requirements, but these were dropped in the face of privacy concerns. A 2010 Colorado law that included reporting requirements to their state tax department was challenged in court but was deemed constitutional.
- HB 1019xx was introduced and passed by the Legislature last week as a way to pay for increased education funding. The bill requires Amazon.com and other online retailers with aggregate annual sales in the state of at least $100,000 to collect taxes on third-party sales through their website. Third-party retailers make up a rapidly growing component of online commerce but are not currently subject to tax in most cases. HB 1019xx is projected to bring in additional revenue of $19.6M in FY 2019 and $20.5M in subsequent years with the money dedicated to the HB 1017 Education Reform Fund. The 2016 bill originally contained language applying to third-party sellers, but the language was struck from the final version.
A real solution could be on the horizon
While Oklahoma’s efforts to boost collections from online sales, including this year’s SB 337 and HB 1019xx, have involved incremental change within the legal framework established by the Supreme Court’s 1992 Quill decision, a more fundamental shift could be on the horizon. The Supreme Court is set to review a case, South Dakota vs. Wayfair, based on a 2016 South Dakota law that directly violated the physical presence test in Quill. If the Court rules in favor of South Dakota, it could result in all states gaining the right to to enforce their tax law on all purchases by their state’s residents. That result might make online shoppers grumble, but it would ensure a level playing field for local businesses, and provide a crucial revenue boost for beleaguered state and local services.
Learn More / Do More
- Remote Sales Tax Collections (NCSL)
- Sales Tax: States Could Gain Revenue from Expanded Authority, but Businesses Are Likely to Experience Compliance Costs (US GAO)
- States Should Adopt a Version of Colorado’s Remote Sales Tax Law (Center on Budget and Policy Priorities)
- Prime Numbers: Amazon and American Communities (Civic Economics)
- Contact Your Legislators