In a decision that has been long anticipated by state and local governments, the Supreme Court last week sided with governments that want online retailers to collect state sales tax from consumers. In South Dakota v. Wayfair Inc., the Court voted, 5-4, to overturn the outdated physical presence standard in the 1992 Quill ruling for the collection of state sales taxes. Kudos goes to organizations like the GFOA who have been pushing Congress for a more equitable and streamlined tax system when it comes to sales tax. Congress never budged, but the Courts finally did.
GFOA members stand to benefit greatly as this is a pretty positive turn of events for state and local governments. For decades, governments have lost billions of dollars in tax revenues as more and more consumption in the U.S. moved online, away from brick-and-mortar stores. The early boom of e-commerce was fueled in part by the fact that goods purchased online were less expensive than the same goods purchased in a store because, for the most part, sales tax was not being collected by online retailers. Writing for the majority, Justice Anthony Kennedy cited a study that estimated the loss of uncollected tax revenue at $33.9 billion annually.
Which leaves us with an interesting question: What to do with an estimated $34 billion in new annual revenue?
Governments have a number of options. They can immediately factor in those new annual revenues into operating budgets; they can use the new funds to pay down liabilities or increase reserves for a rainy day; or they can dedicate them to one-time infrastructure investments.
If the choice is investing, a government could pledge of portion of new internet sales tax revenues for a bonding program, while the remainder could be used for pay-as-you-go capital projects such as a preventative maintenance program. Bonding is all about leverage. Pledging these revenues would enable governments all over the country to jump start capital projects and generate myriad new construction jobs. Assuming a 3x coverage test, $34 billion in new annual revenue would generate about $175 billion in bond proceeds that could be used for critical infrastructure needs like schools or bridges.
Of course, these revenues will not flow to a single government that would have the ability to issue bonds against them – 45 states have a sales tax. But it’s a very positive development, and governments should consider where best to deploy these new funds for the long-term benefit of their constituents.