Next week the Supreme Court will hear South Dakota v. Wayfair. Depending on how the Court rules, the decision could mark the end of the current legal precedent as determined in the 1992 case Quill v. North Dakota. The Quill decision affirmed previous rulings and law saying that a state may force a business to collect taxes for the state only when the business has a physical presence in the state. In reaction, instead of doing the real work of simplifying their tax codes and finding an effective means to collect the taxes they impose, states have been fighting to overturn the Quill standard since it was decided.
State tax collectors generally have been less than excited about the constraints they face under Quill, believing that “their money” was being lost, and seeing legal constraints as a barrier for maximizing state revenue. But that has never been the case. States have always been able to collect sales taxes on purchases their citizens make while outside of the state if the items purchased were brought back to the state to be used in the state. But that requires the state tax collectors to do real work--they would have to collect the tax for themselves. Currently, states conscript merchants to collect sales taxes for them. If a merchant makes a mistake the merchant must pay the penalty, bearing all liability and expense. The states duck liability and gain cash flow.
But also, particular to online purchases, consumers ARE paying sales taxes. According to the GAO, 80 percent of taxes from internet retailers is already being collected. That is in part because the largest states are already collecting 80 to 90 percent of the taxes that they could collect even under some new standard instead of Quill. Moreover, and not considered in that government study, it turns out that 17 of the 18 largest online retailers already collect sales taxes. Failing to collect 100 percent of possible revenue is a state problem since they currently have the authority, just not the will or work ethic, to do so.
It's not a surprise then that the states are awash in revenue given that they actually are collecting an enormous percentage of their imposed taxes. According to the Census Bureau, state and local governments collected a record breaking $404.5 billion in individual income taxes in 2017. And according to the Federal Reserve Bank, state and local government expenditures continue to break records, quarter after quarter. As with the federal government, the problem is spending, not a lack of revenue.
If it’s not about needed revenue then what are the tax collectors up to? South Dakota v. Wayfair reached the Supreme Court after a cynical ploy by pro-tax states to intentionally pass unconstitutional laws--laws that violated the Quill standard, to bait the Court into acting. Their hope is that the Court will strike down the need for a business to have a physical presence in the state before the state can conscript the business into being its tax collector. That is, states want to reach into other states to tax those not in the state and to shift tax collecting liability to merchants from other states.
This was what was happening under the first U.S. Constitution, the Articles of Confederation. The Articles endured for a mere six years before a constitutional crisis erupted with states looting and waylaying their neighbor states. The result was a constitutional convention to try to fix the mayhem. State tax collectors seem to want to return to something like the Articles. Or maybe they do not really care so long as they can maximize revenue with minimal effort and minimal regard for the Constitution.