On April 17, the U.S. Supreme Court heard oral arguments in the case of South Dakota v. Wayfair and will issue a ruling sometime this year. The outcome of the case could determine whether states will be able to force internet-based companies that sell goods online to collect and remit to state governments the sales taxes consumers owe on their purchases. A good ruling for states will give the Arkansas Legislative Tax Reform and Relief Task Force new options for generating revenue and reforming our tax system. However, a bad ruling means Arkansas and other states will need a back-up plan to improve collection of online sales taxes. That plan should include House Bill 1388 of the 2017 session of the Arkansas General Assembly.
The need to improve collection of online sales taxes owed by Arkansas consumers is clear. The Arkansas Bureau of Legislative Research recently noted that online purchases will make up 17 percent of all retail sales by 2020. Sales taxes not collected on online purchases represent a large potential source of lost tax revenue for the State of Arkansas. This lost revenue could be used to pay for critical investments for children and families (think pre-K, juvenile justice and afterschool and summer programs, teacher salaries, better highways and roads, etc.). Or, it could help pay for a state earned income tax credit (EITC) to bolster family economic opportunity for the working families who need it the most.
Under current state law, Arkansas consumers owe state sales taxes on all of their online purchases, regardless of where the company is located. In-state companies that sell products online to Arkansas consumers, such as Walmart, collect the tax owed at the time of sale and remit it to the State of Arkansas (through the Arkansas Department of Finance and Administration-DFA). Existing federal law, however, does not allow Arkansas to force out-of-state e-commerce companies to collect the sales taxes owed by Arkansas consumers unless the company has a “physical presence” in the state, such as employees or a facility.
Without this authority, Arkansas must rely on out-of-state sellers to voluntarily collect this tax and remit it to the state. A few companies, such as Amazon, do just that. Many do not. Arkansas consumers are supposed to voluntarily pay their sales tax using a DFA sales tax return form designed for such cases. As you might expect, most Arkansas consumers do not pay the sales taxes they owe unless out-of-state online companies collect it at the time of sale. This costs Arkansas millions of dollars in state sales tax revenue each year.
What can Arkansas do if the U.S. Supreme Court rules against states in the South Dakota v. Wayfair case? It could adopt House Bill 1388, proposed by Rep. Dan Douglas during the 2017 regular session of the Arkansas General Assembly. HB 1388, which did not pass during the 2017 legislative session, is a version of the Colorado remote sales tax law and has three basic goals. The first goal is to require out-of-state sellers that don’t collect sales taxes to remind Arkansas consumers that they still owe sales taxes. Another purpose is to give DFA the information they need to collect sales taxes from the individuals who owe them. The third goal is to give out-of-state sellers an incentive to begin collecting the sales taxes, other than being required by law to meet the reporting requirements.
Under HB 1388, out-of-state sellers who do not have a physical presence in the state and do not collect sales tax owed by consumers on their purchases would be required to:
- Notify Arkansas consumers at the time of sale that they still owe the sales tax and they are supposed to remit it to DFA via the sales and use tax form;
- Send a notice to all of their Arkansas consumers by January 31 of each year showing, among other things, the amount of their purchases from the company and that they are required to still submit a sales tax form to the state; and
- File an annual report with DFA by March 1 on their sales to each Arkansas consumer.
Out-of-state sellers who fail to meet these requirements are subject to various financial penalties.
Admittedly, adopting HB1388 is not a magic bullet. It would not have the same impact as a positive decision in the South Dakota v. Wayfair case. That case, currently before the U.S. Supreme Court, would give states the authority to force out-of-state sellers without a physical presence to collect the sales taxes owed by Arkansas consumers. HB 1388 would also need to be part of a larger plan to help Arkansas consumers self-remit the sales taxes they currently owe.
However, adopting HB 1388 would likely encourage more Arkansas consumers to meet their sales tax obligations under existing law. It would also encourage more out-of-state sellers to follow the lead of Amazon and voluntarily collect and remit the sales taxes owed by Arkansas consumers at the time of purchase. Together, these improvements would increase Arkansas sales tax collections and generate new revenue for the state budget. This is revenue that could be used to provide much-needed tax relief for low-income working families—those who would be hit hardest by higher sales taxes—or to pay for critical investments for Arkansas children and families. The adoption of HB 1388 would also send a clear message to the Arkansas Congressional delegation: Congress needs to adopt federal legislation giving states the authority to collect all of the online sales taxes owed by their residents.