The days of ordering online without paying sales tax may end in the wake of a U.S. Supreme Court decision, but it’s unlikely Kansas City shoppers on either side of state line will see the effects immediately.
Kansas and Missouri lawmakers see Thursday's ruling overturning Quill Corp. v. North Dakota as an opportunity to raise more money for their states. The court decided 5-4 to allow states to require online retailers to collect sales taxes.
Some see the decision as good news for brick-and-mortar businesses that have complained they’re at a competitive disadvantage. Although many retailers, including Amazon, already collect and remit sales taxes on some or all purchases, some online stores don’t collect sales tax.
“I hear this all the time that individuals will come into their store and look at a product and order it right there,” said Richard Sheets, deputy director of the Missouri Municipal League.
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But online shoppers may see the costs of some products rise by 6.5 percent or more in Kansas and 4.225 percent in Missouri. That’s the statewide sales tax, but cities in both states can levy additional sales taxes on top of that.
Writing for the majority, Justice Anthony M. Kennedy said the Quill decision had distorted the nation’s economy and had caused states to lose annual tax revenues between $8 billion and $33 billion.
“Quill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers,” he wrote. “Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.”
Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel A. Alito Jr. and Neil M. Gorsuch joined the majority opinion.
In his dissent, Chief Justice John Roberts Jr. worried the decision would adversely affect small businesses that might struggle to figure out the requirements in various states.
“One vitalizing effect of the internet has been connecting small, even ‘micro’ businesses to potential buyers across the nation,” Roberts said. “People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country — but probably not if they have to figure out the tax due on every sale.”
Federal estimates released in November show Kansas stands to gain $113 million to $170 million each year. Missouri could bring in an additional $180 million to $275 million. Cities and counties that charge sales taxes could see gains on top of that.
Randall Landes, Kansas City's director of finance, said the city has advocated that Missouri join the Streamlined Sales Tax Agreement, a consortium of states that have banded together to simplify the process to pay sales taxes online and collect taxes voluntarily.
“We have long been seeking this type of relief, and hopefully it will produce some additional tax dollars to the city,” Landes said.
Kansas City doesn’t have an updated estimate of how much more revenue it might receive.
Overland Park expects to bring in an additional $2 million from the 1.125 percent sales tax it charges on top of Kansas’ statewide rate. Spokesman Sean Reilly said the ruling is good news for local governments that have seen their sales tax receipts decline.
Kansas and Missouri may have to pass legislation to take advantage of the court-granted right to require retailers to collect taxes.
Joel Walters, director of the Missouri Department of Revenue, said in a statement that he was “certainly pleased” with the ruling but “it will take some time to process and digest the court’s words and their implications.”
“Beyond that there will be a prolonged period of uncertainty as the U.S. Congress and individual states assess next steps and take a range of potential actions,” Walters said. “This creates opportunities for Missouri, as it does other states, to consider legislative and administrative action in a very different tax policy world.”
He thinks the General Assembly will have to pass legislation to start collecting online sales taxes.
It’s unclear whether Missouri lawmakers might support such legislation and what it would look like.
“I know our brick-and-mortar stores need that support, and I don’t think people are making their purchases online just to avoid a tax,” said Sen. Jill Schupp, D-St. Louis County. “I think they’re doing it for convenience.”
Schupp said the legislature had looked at joining the streamlined agreement for a long time and she was hopeful that members would pass legislation allowing the state to require taxes on online purchases.
“It’s not actually raising a tax,” said Rep. Kathie Conway, R-St. Charles. “It’s just collecting a tax that’s already due.”
Sen. Bill Eigel, R-St. Charles County, said he’d like to see corresponding income tax cuts if Missouri moves to start collecting internet sales taxes, but he argued Missouri already has the authority to start collecting the tax and doesn’t need legislative approval.
Regardless, Eigel said, it would take a couple of years to set up the mechanisms to enforce the taxes.
“I don’t think these are revenues that we're going to suddenly start seeing or that we’re going to suddenly start seeing next year,” he said.
Rep. Kristey Williams, R-Augusta, said the Kansas Department of Revenue had already reached out to some lawmakers on Thursday about the ruling and how to move forward.
A bill that would have paved the way for Kansas to begin collecting sales tax on online sales advanced out of a House committee this year but didn’t pass.
“We’re hoping that we can take a look at the ruling, find out the measure we were going to pass, what we can do to adapt that so Kansas can quickly start to implement the internet sales tax,” Williams said.
In practical terms, Kansas may not begin collecting from online sales for another year, according to Rep. Steven Johnson, an Assaria Republican who chairs the House tax committee. Once lawmakers return in January, it may take up to three months to pass legislation and then additional time for the state to implement it, he indicated.
What to do with the additional revenue could also complicate efforts to pass a bill.
Kansas government is in much better financial shape than it was a year ago. Lawmakers last year rolled back much of the income tax cuts put into place in 2012 under then-Gov. Sam Brownback, but the state still faces financial hurdles. Chief among them is a plan to boost education spending by $500 million over five years to comply with the Kansas Supreme Court.
Johnson said he would be surprised if there aren’t proposals to tie legislation to efforts to reduce tax rates. Both Republican and Democratic lawmakers have spoken of reducing the sales tax on food for years. Kansas taxes food at the same rate – 6.5 percent – as any other product, something that many other states do not.
Williams said she would like to see a balanced approach, perhaps devoting half the additional revenue to funding the state’s pension program or reducing state debt.
“The other half, I would love to see the food sales tax reduced,” Williams said.
Erik Sartorius, director of the Kansas League of Municipalities, said the court’s decision will help local businesses remain competitive.
Some fear the ruling will harm small businesses, however.
The American Legislative Exchange Council said the decision would usher in a “unheralded period” in interstate commerce, where small businesses would be subject to more than 12,000 taxing jurisdictions. Jonathan Hauenschild, who authored ALEC's brief for the Supreme Court on the topic, in a statement predicted many businesses will likely limit their reach rather than face audits from states like California, Illinois or New York.
“They will face audits and compliance costs very few can comprehend,” Hauenschild said.
Sheets said technology can help with compliance.
When the issue of tax on mail-order business came up in the 1960s, Sheets said, “The biggest problem had been how do you know the sales tax in the jurisdiction in Barry County, Missouri?”
Now, Sheets said, “there’s a number of companies, number of programs that have been written that identify the sales tax down to an address.”