Of course, sales tax is supposed to be paid on any purchase, but many online and mail-order purchases didn’t add it in when the person bought a product. Technically, the individual is supposed to add that sales tax amount when he or she files a state income tax return, but many people don’t (or don’t report all of the tax they have due), so theoretically, the state and Wisconsin localities miss out on that money.
In June, the US Supreme Court ruled in a South Dakota case ( South Dakota v. Wayfair, Inc.,) that allowed states to apply sales tax to any business that sold a certain amount of product to state residents, even if the business did not have any stores in the state. The Legislative Fiscal Bureau filed a report soon after explaining how that ruling could apply to Wisconsin, and how the state’s budget might be affected.
Current Wisconsin Law. Because Wayfair overturned Quill's physical presence requirement, the manner in which state law is "otherwise limited by federal law" has been modified with regard to extending nexus to remote out-of-state sellers. DOR indicates that current law now requires it to begin collecting tax on remote sales. However, unlike South Dakota, the Wisconsin statutes do not specifically provide for an electronic nexus threshold. Therefore, it is unclear that requiring out-of-state vendors to collect tax without changes to the statutes or administrative code would comport with the Complete Auto test. DOR is currently reviewing this issue.
Fiscal Impact. Based on information supplied by DOR and the U.S. Census Bureau, it is estimated that expanding sales and use tax collection obligations to out-of-state vendors in compliance with the Wayfair decision would increase state sales and use taxes by $120 million on an annual basis. This estimate is expressed in 2018-19 dollars and assumes Wisconsin would utilize a safe harbor provision for remote sellers similar to the economic thresholds enacted by South Dakota. If changes were made to the administrative code or the statutes such that DOR could extend nexus to remote sellers beginning October 1, 2018, it is estimated that state sales and use tax revenues would increase by $90 million in 2018-19 and $120 million in 2019-20. Further, it is estimated that county and professional stadium park district sales and use tax collections would increase by $7.7 million in 2018-19 and by $10.3 million in 2019-20.
Sure enough, on October 1, the Wisconsin Department of Revenue implemented a new rule that automatically collects sales tax from any business selling online to Wisconsinites, except for
…sellers who do not have annual sales of products and services into the state of (1) more than $100,000, or (2) 200 or more separate transactions.Scott Walker’s Department of Administration assumed that extra sales tax when it provided its revenue estimates for the next state budget. and from my limited experience, it seems like most online retailers do charge sales tax these days, so that part seems to be working out.
But there’s a second part that may have to be dealt with due to the added online sales taxes, and it relates to a provision inserted by the GOP Legislature a couple of budgets back. Basically, it could trigger an offsetting income tax cut for all Wisconsinites, which makes the net impact on the budget to be $0.
Under a provision created in 2013 Wisconsin Act 20, as amended by 2017 Wisconsin Act 59, state law establishes procedures for reducing state individual income taxes by modifying the rate and Page 4 bracket structure if certain conditions are met. The provision specifies that additional state sales and use tax revenues resulting from "any federal law" that expands the state's ability to require out-of-state sellers to collect and remit tax on remote sales to Wisconsin residents be used to reduce income tax rates. First, DOR is required to determine how much additional revenue has been collected by the state during the first 12 months following the date on which the state begins collecting additional taxes as a result of the federal law. Second, DOR is required to determine how much the individual income tax rates could be reduced in the following taxable year so that income tax revenues would decrease by an amount equal to the estimated increased state sales and use tax revenues (excluding any increased county or professional stadium park district revenues). The individual income tax rate reductions must be calculated in proportion to the share of gross tax attributable to each of the tax brackets in effect during the most recently completed taxable year. After DOR has prepared these estimates and tax rate calculations, DOR is required to certify the revenue estimates and new tax rates to the Secretary of the Department of Administration, the Governor, and the Legislature. The new tax rates would take effect in the taxable year beginning after DOR's certification.That last sentence is key, as the LFB estimates that single individuals that make less than $11,230 (based on the 2017 state tax brackets) would get about $3 per person, and most married couples in the working, middle and upper-middle classes were estimated to get an average income tax break of $55 (equivalent to the sales tax of $1,000 a year in online sales). But married couples who make above $330,000 would get an estimated income tax break of $592. Those individuals would have to spend over $200 online each week to not be better off in this scenario.
At the time Act 20 was enacted, there were Congressional efforts to override the Quill decision by permitting states to impose the sales and use tax on retailers who lacked a physical presence in their state. The Act 20 provision likely presumed a Congressional law change would serve as its trigger. Nonetheless, given that the law of Quill has been reversed, the U.S. Supreme Court's Wayfair decision could reasonably be construed as "any federal law" triggering the Act 20 provision. Assuming additional legislation or an administrative rule change is needed before the 12-month sales tax collection period can begin, income tax changes could occur as early as tax year 2020, but could occur in tax year 2021, or thereafter….
For tax year 2017, statewide gross taxes are estimated at $9,745.8 million, and the estimated tax shares generated by the four rates range from 10.7% for the 4.00% rate to 55.7% for the 6.27% rate. Based on these percentages, the Act 20 provisions would have allocated proportionate reductions to each rate or bracket that total $120 million statewide. Each rate would be reduced by an estimated 1.2%, and those rates are reported in the column labelled "Estimated Tax Rate." Although the percentage reduction is uniform, the absolute reduction, reported in the last column, increases with each rate.
Granted, that the extra sales tax (and offsetting reduction) is only expected to be $60 million a year instead of $120 million, now that some more data has rolled in. But that could change again as Christmas shopping season will give us a better idea on the overall effect. Also, in their summary of the newly-released lame duck bills, the LFB says the GOP wants the offsetting income tax cut to happen even sooner.
Based on the additional sales and use tax revenue that DOR determines has been collected, require the Department of Administration (DOA), in consultation with DOR, to determine how much individual income tax rates will be reduced, rather than requiring DOR to make that determination. Specify that the tax rate reduction take effect for the taxable year ending on December 31, 2019 (tax year 2019), as opposed to the tax year following the 12-month period for which the additional sales and use tax is determined. Require the Secretary of DOA to certify and report the additional sales and use tax revenue and income tax rate determinations to the Governor, the Joint Committee on Finance, and the Legislative Audit Bureau no later than October 20, 2019, rather than requiring DOR to make that certification to the Secretary of DOA, the Governor, and the Legislature after DOR makes the tax rate determination.But since the lower income tax rate wouldn't be in effect for much of 2019, you wouldn't see a benefit until you file your taxes in early 2020 (if you see any benefit at all). Quite convenient, isn't that?
The WisGOP Legislature likely won’t care about the regressiveness of this tax swap, and they’ll use this maneuver to claim they have cut the tax burden even more on Wisconsinites. And I suppose you can claim that always collecting sales tax online will push more people into entering brick-and-mortar stores and possibly prevent more closings and dead malls, which I agree would be a good thing all around.
But given the early reports on Christmas shopping, it seems people increasingly are choosing the online option for convenience over going inside the stores, which means more online sales tax can be expected going forward. It won't get the attention of the vote-suppression and power-grab parts of the lame-duck bills, but many of us will pay slightly more while the rich end up better off in the long run in the tax shift that's buried in the legislation.