A recent Supreme Court ruling doesn't appear to invalidate Idaho's new law regarding online retailers and sales taxes, but the issue likely will be discussed during the next legislative session.
The Idaho law, which took effect Sunday, tries to level the playing field for brick-and-mortar stores. It requires online retailers to collect and remit the 6 percent state sales tax on sales to Idaho residents, if they meet certain conditions.
Rep. Lance Clow, R-Twin Falls, worked on the legislation for several years before it finally passed during the 2018 session. It expands the definition of "retailer engaged in business in Idaho" to include out-of-state firms that do at least $10,000 in online sales to Idaho residents each year, so long as they have some sort of affiliation with an Idaho business.
That affiliation could be as simple as hiring an Idaho sales agent or placing an ad or link on an Idaho firm's website. The expanded definition clarifies that online retailers who market to Idaho customers must collect the state sales tax, even if they aren't physically located here.
Physical presence was a central issue in the June 21 U.S. Supreme Court ruling in South Dakota v. Wayfair Inc.
In two prior decisions - the Bellas Hess ruling in 1967 and the Quill decision of 1992 - the nation's highest court determined that states cannot require online or mail-order retailers to collect sales tax unless they have some sort of "physical nexus" in the state, such as a store or warehouse.
The 5-4 Wayfair decision overturned both of the earlier rulings, however, saying in today's economy the physical nexus requirement has essentially become "a judicially created tax shelter (for online retailers). It treats economically identical actors differently, for arbitrary reasons."
Like Idaho, South Dakota historically required residents to voluntarily report and pay the sales tax on their online purchases. Compliance with the law was quite low, though - as is the case in Idaho.
South Dakota estimated it was losing around $50 million per year due to poor compliance. To address the issue, it passed legislation requiring online retailers to collect the tax, as long as they had at least $100,000 in sales or more than 200 transactions to South Dakota residents.
That's a different standard than the Idaho law, but Clow noted that the "affiliation nexus" Idaho now uses has been litigated in other states and seems to pass constitutional muster.
"No one has said our approach isn't sound, so my feeling is we're OK," he said.
The South Dakota approach, however, might capture a broader group of online or mail-order retailers than Idaho's affiliation standard. Consequently, it may make sense for the Gem State to switch, purely from a revenue standpoint.
Clow said he's willing to look at that issue, but he's not convinced things need to change just yet.
"Both approaches leave some money on the table," he said. "The (number of online retailers) who are exempted from the South Dakota law might be about the same as the group that's exempted from our affiliation standard. I think we need to sort through the results of what we've already done. Then we can tweak and revise if needed."
That said, Clow does expect this to be a topic of discussion during the 2019 legislative session.
Another "joker" in the mix, he noted, is the fact that South Dakota belongs to the Streamlined Sales and Use Tax Agreement, which tries to simplify state and local tax codes to make it easier for online retailers to collect the sales tax.
It's unclear how critical that was to the court's Wayfair decision - another reason Clow is hesitant to follow in South Dakota's footsteps.
The Idaho Legislature previously debated joining the Streamlined Sales Tax agreement. Former Lewiston Rep. Jeff Nessett introduced an 80-page bill in 2012 to pave the way, but it never made it out of committee.
Clow's bill earlier this year, by comparison, was two pages long and simply expanded the definition of which businesses qualify as an Idaho retailers.
If the South Dakota approach depends on joining the Streamlined Sales Tax agreement, he said, "that may be a bridge too far."
Nationally, online sales account for about 9 percent of all retail sales. If that's a good estimate for Idaho as well, it amounts to almost $2.5 billion per year - so the 6 percent sales tax on online sales would bring in about $148 million per year.
Some of that is already being collected and remitted voluntarily. Clow estimated his bill will increase Idaho sales tax collections by about $22 million to $37 million per year.
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