Yes to fairness, but for taxpayers too

The U.S. Supreme Court’s ruling in South Dakota v. Wayfair allows states to require out-of-state internet retailers to collect and remit sales tax when they do business with in-state customers. Given the ruling, Arkansas lawmakers will likely revisit the issue of taxing out-of-state internet sales as they have done the past several legislative sessions. We must consider what is fair for all taxpayers, including both brick and mortar retailers and consumers.

The most compelling reason for requiring out-of-state retailers to collect and remit sales tax is the basic principle of fairness: to level the playing field between in-state brick and mortar stores like Bedford Camera and Video and large out-of-state internet retailers like Wayfair. Retailers like Walmart sell online but collect sales tax because they have a physical presence in Arkansas.

The 1992 Supreme Court decision in Quill v. North Dakota established the physical nexus test overturned by the Court in Wayfair. Treating in-state and out-of-state retailers the same will not diminish the convenience of online shopping, but it will provide for fair tax treatment. But in the process of leveling the playing field, we should seize this opportunity to provide tax relief by returning any increase in state sales tax revenue to the taxpayers. Fairness cannot be a one-way street.

Some argue that a tax on out-of-state internet sales is not a “tax increase” since individuals and businesses are already supposed to pay an Arkansas use tax each year on any taxable purchases on which the sales tax was not collected by the seller. This is technically true. It is also true that very few individuals comply with this law since most are unaware it exists, and it is too cumbersome for most Arkansans to keep track of every purchase throughout the year to remit a small amount of use tax. Since compliance is rare, requiring out-of-state retailers to collect and remit taxes will have the functional effect of increasing the tax burden on Arkansans who purchase goods over the internet. Technicalities aside, at the end of the day, more money will go to the government and less will be left in the pockets of taxpayers.

The increase in state tax receipts is projected to total in the tens of millions of dollars (if not more) per year and will be a windfall to the state treasury. But an unexpected increase in tax receipts should not lead to more spending. Our spending should be driven by our needs rather than how much money we have. For example, thanks to Governor Asa Hutchinson’s leadership, through the Transformation Advisory Board we are identifying areas where government can do more for less—spend less and give better service to the taxpayer. We should remain steadfastly focused on reforming state government, not spending more hard-earned taxpayer dollars. And those who believe we need to spend more should make the case to the voters anew and not through the back door of a surprise court decision. Let’s level the playing field for Arkansas brick and mortar businesses without growing a state government that taxes too much and spends too much.

In 2015, the legislature passed Act 709, requiring the state to do exactly what I just described, but with one notable exception—only tax receipts exceeding $70 million will be returned to taxpayers through tax relief. Unless the law is amended, it is possible that Arkansas taxpayers won’t see any tax relief. The state should return every dollar generated from taxing out-of-state internet sales to the taxpayers by reducing tax rates.

When I was a member of Congress, I was a co-sponsor of Chairman Steve Womack’s Marketplace Equity Act. I’ve always believed in leveling the playing field for Arkansas’s local businesses that are so important to our economy. I’ve also always believed that the increase in tax receipts from taxing out-of-state internet sales should result in reduced taxes, not increased spending.

On July 24, 2012, as a member of the U.S. House Judiciary Committee I attended a hearing on Chairman Womack’s Marketplace Equity Act where two of my Democratic colleagues from California argued that Congress must address taxation of internet sales because California was missing out on $1.8 billion per year in tax revenue. They thought the purpose of the legislation was to line the pockets of state governments in order to increase spending.

We should resist the urge to spend more money and focus on spending money more wisely. We must also be careful regarding our treatment of small businesses and not make it harder for today’s fledgling startups to become tomorrow’s successful companies. The compliance burden should be borne by government, not the private sector. Common sense should be our guide: We don’t need aggressive tax collectors sending threatening letters to everyone selling homemade crafts on eBay or Etsy.

Ultimately, fairness means doing right by both sides. Leveling the playing field for brick and mortar businesses is a noble and worthwhile goal, but it shouldn’t come at the expense of hardworking taxpayers. If we take the appropriate action, it won’t have to.
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Editor’s note: Tim Griffin is the lieutenant governor of Arkansas. The opinions expressed are those of the author.