The Washington State Legislature has just struggled through another difficult budget session, cutting and patching in yet another attempt to deal with rising costs and recession-shrunk revenues. Future biennial shortages of a billion dollars or more are projected.
Yet latest estimates show our state and local governments lose roughly a billion dollars a biennium because states can’t require out-of-state “remote sellers” to collect sales taxes on their behalf.
It’s been nearly 20 years since the U.S. Supreme Court ruled that forcing businesses nationwide to follow the many different jurisdictions’ tax applications, rates, and rules was an unconstitutional burden on interstate commerce. So if a business had no physical presence in a state, that state could not require it to collect sales tax on items sold to residents or businesses there.
The court also ruled that Congress had the power to remedy this situation, and that the taxes were still valid, due and payable. Collecting and remitting them was the issue.
Two dozen states have formed a compact to pursue federal legislation jointly, agreeing to streamline their sales tax systems to make them more alike. Washington, once one of the minority of states to credit local sales taxes to the point of sale jurisdiction, went through a very difficult multi-year change to “point of delivery.” State and national associations of cities and counties have made this issue a top congressional lobbying priority. But years go by and Congress does not act.
That’s partly because the well-heeled telecommunications industry insists on tying one of its favorite goals to any remote sales tax collection bill. They want Congress to remove local governments’ ability to set private utility tax rates, placing that authority with the states. That would preclude even voted tax increases such as Olympia’s parks and pathways revenue. One proposal even threatens locals’ ability to regulate the telecoms’ use of public rights of way. Cities vehemently oppose these efforts.
For a while the states hoped to get a significant fraction of their lost revenue through the multistate compact’s negotiations with so-called voluntary remitters. Remember: The Supreme Court had declared that the taxes were valid and due. Some large online retailers, perhaps fearing huge back tax bills, agreed that as states streamlined their sales tax systems they would begin collecting and remitting taxes on items delivered within those states. But despite its streamlining effort Washington has received only about one-fifth of that projected revenue.
Frustrated by the congressional logjam, some states are going to court. New York has prevailed in federal court with its contention that, in this digital age, a transaction that passes through a computer server in that state constitutes a physical presence and makes the sales tax collectible. North Carolina has sued a major online retailer for its refusal to turn over records of sales to residents of that state. Other states may have litigation active or pending. It’s likely that some or all of these may come before the U.S. Supreme Court.
Why is this a hopeful development? For one thing, technology has changed amazingly over the past two decades. Large retailers now have enough computer power to keep track of the hundreds of tax applications, rates and jurisdictions, and to collect and remit those taxes accurately. Smaller retailers could easily subscribe to a service for that chore. The too hard argument just isn’t convincing now.
Also, today’s Supreme Court doesn’t seem shy about extending its writ beyond the specifics of a case before it — just look at its recent decision that stretched way out to overturn decades of campaign contribution legislation. If taken up by that court, the limited New York or North Carolina cases might trigger the larger issue.
While Washington’s Department of Revenue still pursues Congressional action and voluntary remitter taxes through the multi-state compact, there’s no real sign that our state government is really trying to turn up the heat on this issue. Maybe our state elected officials worry about being tarred with the new taxes brush. But sales taxes are not new.
In a state with no income tax, and so dependent on sales tax that it has to nickel and dime consumers of candy and majorbrand beer to barely make ends meet, it makes no fiscal or political sense not to try harder to collect taxes that were voted in decades ago.
Meanwhile, thousands of outof-state businesses continue to enjoy a huge advantage over local retailers, who pay the business and property taxes and collect the sales taxes that support services our citizens need. They also support our community activities and nonprofit agencies. The out-ofstate sellers — and their customers — skate free.
It’s time for Washington state to focus harder on recovering this huge lost resource.
Mark Foutch is a former mayor of Olympia and past president of the Association of Washington Cities.