Lame duck idiocy means online sales taxes have to be dealt with in the budget

One item in the list of tax issues that are scheduled to be cleared up at Thursday's Joint Finance Committee meeting deals with online sales, and making sure those sellers pay sales taxes when Wisconsinites buy their products. And yes, it involves cleaning up a prior GOP screw-up, and there is a difference between what Governor Evers wants, and what GOPs likely want.

The issue derives from when the GOP State Legislature and outgoing Governor Walker jammed through the Lame Duck Bills after Walker lost to Evers in November’s election. One of the items they had included a way to conform state law with a Supreme Court decision (known as the Wayfair decision) that required states to collect sales taxes from businesses selling items online. The Legislative Fiscal Bureau explains that both the Legislature and Governor Evers thought the change was permanent, but it turns out that change is only good for this year.

At the time 2017 Wisconsin Act 368 [the Lame Duck Laws] was enacted, the amended [2017-19 budget] provision was expected to reduce tax rates on an ongoing basis beginning in tax year 2019. Reductions of $60 million were incorporated into the amount of individual income tax collections estimated for 2019-20 and 2020-21 that were reported by this office in its January 30, 2019 revenue estimates, and those amounts were used by the administration to prepare the biennial budget. However, the amended statute reads, "the new tax rates take effect for the taxable year ending on December 31, 2019" and that the tax rates "apply to the taxable year ending on December 31, 2019." After reviewing the language of Act 368, DOR has indicated that it interprets the law to mean the income tax rate reduction applies to tax year 2019 only. On May 1, 2019, DOA submitted an errata seeking to clarify that the tax rate reduction is ongoing.

You mean that hastily-written power grabs result in bad legislation that needs to be corrected at a later date? I’m shocked, SHOCKED!

So the Evers Administration wants to continue this tax break, but with a difference. Instead of having the income tax cut be “across the board” of all tax brackets, like the GOP’s plan was, Evers wants it to only apply to the state’s bottom tax bracket. As the LFB notes, the Evers proposal would increase the tax cut for everyday Wisconsinites while greatly reducing the disparities that the “across the board” cut would have.

The LFB used the expectation that this one-year income tax cut would end when it updated revenue estimates last month, which resulted in an extra $60 million “in the bank" for 2020-21. So if that tax cut is extended past this year, then there will be a little less money to play with for other items in this budget, although the overall difference is slight when comparing the two ways to keep the income tax cut in place.

If the Committee believes the Legislature intended the tax rate reduction to be ongoing, rather than apply only in tax year 2019, the Committee could modify the bill to amend the tax rate reduction statute to accomplish this purpose. Because this office reflected the DOR determination in its May, 2019, revenue reestimates, this modification would have the effect of reducing individual income tax collections by over $60 million in 2020-21. However, making the tax rate reduction ongoing would result in a somewhat different fiscal effect, depending on whether the Committee adopts the Governor's proposed tax rate reduction or retains the tax rate reduction under current law. If the Committee modifies the Governor's proposal to limit the tax rate reduction to the tax rate for the bottom income bracket, a 2020-21 tax decrease estimated at $63.2 million would result (Alternative 3). If the Committee modifies the across-the-board tax rate reduction authorized under current law, a 2020-21 tax decrease estimated at $64.7 million would result.

This issue could also be combined with another suggestion that Evers has in the budget, which is intended to make sure more people who sell products online pay the same sales tax on items sold to Wisconsinites that physical stores have to.

Under the bill, a marketplace seller would mean a seller who sells products through a physical or electronic marketplace operated by a marketplace provider, regardless of whether the seller is required to be registered with DOR. In addition, the bill would add to the definition of a retailer a marketplace provider who facilitates, on behalf of a marketplace seller, taxable sales of goods and services that are sourced to Wisconsin. The bill would expand the definition of a retailer for purposes of sales tax collection to mean every seller who makes any sale of tangible personal property or services, regardless of whether the sale is made on the seller's own behalf or on behalf of another person (the bill would similarly modify the definitions of sale and seller under current law to clarify that the definitions apply regardless of whether the sale is made on the seller's own behalf or on behalf of another person). As a result, both marketplace providers and marketplace sellers could be regarded as retailers for purposes of the sales tax. …

In general, the bill would not change the underlying taxability of goods and services. If an item is taxable or exempt under current law, that item is taxable or exempt under the bill. As stated, the bill would specify that a marketplace provider is liable to collect and remit state sales and use tax, and any other applicable taxes and fees, on sales it facilitates on behalf of a marketplace seller. This treatment would apply to all marketplaces where the structure of marketplace provider and marketplace seller exists, regardless of the taxable product or service being sold.

The LFB goes on to add that Evers’ budget provision came about because it appears that a lot of online sales to Wisconsinites are avoiding sales taxes, to the tune of $67 million a year.

DOR began requiring remote sellers to collect and remit sales tax following Wayfair on October 1, 2018. It was originally estimated this would result in additional state tax collections of $90 million in 2018-19 and $120 million annually thereafter. However, these estimates were subsequently reduced to $45 million in 2018-19 and $60 million annually thereafter.

6. The original estimates for Wayfair-related sales tax collections were reduced primarily because of lower observed compliance than originally expected. This lower compliance served as a primary impetus for the Governor's recommendation to include the provisions described in this paper, which are designed to further address sales tax collection and remittance following Wayfair. Together with this provision, total Wayfair-related sales tax collections would be estimated at $86,800,000 in 2019-20 and $127,100,000 in 2020-21 and annually thereafter.

It’s an interesting pickle to be in, and if the GOP-controlled Joint Finance Committee doesn’t go along with tightening up the online sales tax laws like Evers wants, then there’s another $93.9 million that goes missing from the budget over the next 2 years. It also will lead to complaints from brick-and-mortar retailers and hotels about advantages that online businesses and Air B-n-B type places might get if they aren’t brought into sales tax compliance.

This may not be the main item of taxes that people will talk about in the next 48 hours, but it's one that'll tell us a lot over what is prioritized, and what isn't.