As the Kansas Legislature convenes in January, lawmakers in the Sunflower State are considering legislation that would levy taxes on out-of-state internet sales as a source of state revenue.
Although revenue projections from these potential taxes make the legislation seem like a good idea, out-of-state internet sales taxes inherently reduce states’ accountability to taxpayers and will ultimately lead to higher costs for consumers.
For years, states avoided the legal complexities of implementing internet sales taxes on persons or businesses without a physical presence in the state. However, after the U.S. Supreme Court upheld South Dakota’s internet sales tax law in South Dakota v. Wayfair, all of this began to change.
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 v. South Dakota ruling overturned decades of sales tax law and has encouraged many states to issue new sales taxes on online businesses and consumers. In response to the ruling, the Kansas Legislature is now primed to consider several bills that would impose new taxes on remote vendors.
Between burdensome licensing laws, onerous fees, and arduous regulations, small businesses already face substantial barriers. Adding a new internet sales tax would only tighten the screws on small businesses.
At present, small businesses face a labyrinth of taxing bodies. According to the Tax Foundation, there are more than 10,800 sales tax jurisdictions in the United States. Increasing the number of taxes and taxing bodies on small businesses, during an epidemic, would make it more difficult for struggling small businesses to stay afloat.
Applying sales taxes to internet transactions would produce negative consequences, as well. 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 has been further exacerbated during the ongoing pandemic.
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 greater than $250,000. Meanwhile, in Massachusetts and Tennessee, the threshold is $500,000. If Kansas lawmakers ultimately choose to impose an internet sales tax, it should set the threshold as high as possible, allowing maximum exemptions for small businesses.
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 good solution for filling their revenue deficits. Internet sales taxes, and tax hikes in general, ultimately raise the costs of goods and services for all residents, while also posing significant challenges to small businesses 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 Kansas Legislature should consider all of these factors as the new session is underway.
For more information on state internet state taxes, click here.
