With legislative sessions convening around the nation, almost every state is looking for ways to raise revenue following the coronavirus-related recession. In Florida, this has manifested in the form of potential legislation that would levy taxes on out-of-state internet sales as a possible source of state revenue.
Both chambers of the Florida Legislature are considering a form of this new tax, with HB 15 in the House and SB 50 in the Senate. The proposed legislation would mutually require internet retailers and online marketplaces to collect state sales taxes.
Although these bills (and projected revenue) may seem appealing to lawmakers, out-of-state internet sales taxes inherently reduce states’ accountability to taxpayers and will ultimately lead to higher costs for consumers.
Historically, states have avoided the legal complexities of implementing internet sales taxes on persons or businesses without a physical presence in the state. However, when the U.S. Supreme Court upheld South Dakota’s internet sales tax law in South Dakota v. Wayfair, things changed swiftly.
The ruling overturned the 25-year-old “physical presence nexus” standard set in Quill Corp. v. North Dakota. Under this new standard, a business may be required to pay sales taxes to a state or local government even if it has no physical location, or nexus, in the taxing jurisdiction.
The Wayfair decision reversed decades of sales tax law, and has encouraged many states to impose new sales taxes on online businesses and consumers. In response to the ruling, the Florida Legislature is now considering HB 15 and SB 50.
Between burdensome licensing laws, heavy fees, and onerous regulations, small businesses already face substantial barriers. Adding a new internet sales tax would only increase the strain on small businesses.
Moreover, small businesses already face a maze of taxing bodies. According to the Tax Foundation, there are more than 10,800 sales tax jurisdictions in the United States. New sales taxes on internet transactions will make it more difficult for small businesses to remain in operation. This is especially worrisome for small business owners who are struggling to remain open amid a worldwide pandemic that has caused much economic hardship.
Applying sales taxes to internet transactions would produce significant consequences. First, the power state governments wield over retailers outside their borders would dramatically expand. Second, because individual states have very different definitions and rules on sales taxes, confusion, and uncertainty for out-of-state buyers and sellers is inevitable.
Supporters of online taxes argue these taxes are needed to restore a competitive balance between online and brick-and-mortar retailers. However, the imposition of sales taxes on internet transactions would slow the expansion of e-commerce, one of the key growth sectors of the U.S. economy. According to a study from the Kem C. Gardener Policy Institute at the University of Utah, e-commerce retail sales have grown 15-fold since 2000. From an estimated $23 billion to an estimated $371 billion annually. A trend that was further exacerbated by the pandemic, as people turned to online shopping in droves.
The majority of states that have enacted out-of-state internet sales taxes have adopted South Dakota’s monetary thresholds for their new tax laws, while others have chosen to expand the threshold in an attempt to exempt a larger number of small businesses. Alabama, Connecticut, Georgia, and Mississippi all set their thresholds for exemption at a greater $250,000. Meanwhile, in Massachusetts and Tennessee, the threshold is $500,000.
SB 50 would require sales tax collection from any person or business whose remote sales to Florida exceed $100,000 per year. If Florida lawmakers ultimately choose to impose an internet sales tax, SB 50 should be amended to make the threshold for the tax exemption as high as possible, allowing maximum exemptions for small business owners throughout the country.
While many states are still reeling from lost revenue due to the pandemic and mandated lockdowns, out-of-state internet sales taxes are not a solution. Like all taxes, internet sales taxes will ultimately raise costs of good for residents of the Sunshine State, while also posing significant challenges to small business that may be situated throughout the nation. Allowing one state to tax a resident of another state represents an expansion of state taxing powers, which logically end at the state’s borders. Members of the Florida legislature should consider all of these factors as they deliberate HB 15 and SB 50.
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