Much at Stake in U.S. Supreme Court Online Sales Tax Case

Today, the Supreme Court of the United States (SCOTUS) will hear oral arguments in South Dakota v. Wayfair. Wayfair Inc., Overstock.com and another online retailer challenged a South Dakota law that calls for them to collect South Dakota’s sales tax on their sales to South Dakota residents, even though the companies have no physical operations or physical presence in the state.

The online retailers’ position is supported by precedent. Over 50 years ago in National Bellas Hess Inc. v. Department of Revenue of Illinois (1967), SCOTUS found, based on Commerce Clause protections, that Illinois could not require an out-of-state business to collect its sales tax unless the business had a “physical presence” in Illinois.
This “physical presence” test was affirmed in Quill v. North Dakota (1992) when the Court ruled that North Dakota could not require a mail order company to collect its sales tax, again citing the requirement as an unreasonable burden on interstate commerce. But the Court’s opinion seemed to acknowledge that different circumstances could yield different results.

And much has changed since 1992. Most notably, the internet was only in its infancy then and online retailers were unheard of. The application of Quill to a transaction and industry that barely existed when the opinion was issued has generated growing debate over the last 10 to 15 years. Pressure to overturn Quill has steadily grown as internet sales swallow up a larger market share each year, traditional brick-and-mortar retailers see their profits decline, states see their revenues decline and the “burden” associated with collecting the taxes has been steadily lessened by technological advances.

Congress has the authority to legislatively overturn Quill but countervailing political forces have impeded it from remedying the situation. Consequently, states have legislated an array of their own remedies, in the form of imaginative and constitutionally suspect laws. As part of a concerted effort across the country, advocates for overturning Quill began a campaign designed to present a new basis for testing the Quill holding.

It encouraged states to impose laws they knew would be challenged, in order to get a fresh case before the Supreme Court and give them the opportunity to argue Quill’s legal obsolescence. The laws would purport to establish legal nexus based on the level of sales that online businesses conduct in their state. This concept is referred to as “economic nexus”.

In comes South Dakota – the first state to pass legislation imposing the collection requirement based on a defined economic nexus. If an online seller has more than $100,000 in sales or more than 200 separate sales to South Dakota residents, then that retailer must collect the sales tax in those transactions. The South Dakota law served as the model as a few other states passed nearly identical legislation, including Indiana (in 2017). South Dakota fast-tracked the litigation and here we are with a potential landmark case before SCOTUS.

Will Quill be overturned? It seems very possible. First, the Court took the case which could be interpreted as a recognition that the issue needs to be revisited. Second, three justices have questioned the application of the Quill case. And many stakeholders have presented legal arguments to support and encourage the Court to reach an updated result. Forty amicus curiae (friend-of-the-court) briefs have been filed since the Court decided to hear the case in January.

These include briefs filed on behalf of: various retail business associations, 41 states collectively, the National Governors Association, the National Conference of State Legislatures, the Council of State Governments, the National Association of Counties, the National League of Cities, four U.S. Senators (two Republicans, two Democrats) and the Solicitor General of the United States.

Numerous other organizations filed briefs, including: the Multistate Tax Commission, Streamlined Sales Tax Governing Board and Tax Foundation. One was filed on behalf of “professors of tax law and economics at universities across the United States”. All these can be viewed here. Some taxpayer advocates argued against giving states the authority to require collection. But a majority favor overturning Quill. Typical is the argument of the Solicitor General, stating in its brief:

“In light of internet retailers’ pervasive and continuous virtual presence in the states where their web sites are accessible, the states have ample authority to require those retailers to collect state sales taxes owed by their customers. Quill Corp. v. North Dakota, 504 U.S. 298 (1992), should not be read to bar that result, both because the Quill Court did not and could not anticipate the development of modern e-commerce and because Quill’s analysis was deeply flawed.”

The Tax Foundation, whose brief does not directly support either party, made some important points. It recognizes that the U.S. Constitution’s Commerce Clause prohibits states from unduly burdening or unfairly taxing interstate commerce. But it also recognizes that the current hodge-podge of state laws is untenable. The Tax Foundation maintains that the South Dakota law is constitutional because it minimizes the burden on commerce by adhering to uniform and standard administration. Its brief sums it up saying:

“The Court’s guidance is needed before the states subject interstate commerce to death by a thousand cuts. (And it asks that) the Court reverse the decision of the Court below and uphold the South Dakota statute, but also resolve an almost universal lack of clarity about the proper scope of state sales taxation of out-of-state entities.”

The outcome of this case, 50 years in the making, will have a significant impact on many people. States and local governments care about this case because there is around $20 billion of state tax revenues at stake. (Estimates range from $13 billion to $26 billion and the number will only get larger as time goes by.) Indiana’s share would probably be in the $200 million range, so the state’s budget makers care.

Brick-and mortar retail businesses in Indiana care because they must compete with online retailers and having to charge their customers the 7% Indiana sales tax puts them at a price disadvantage to the online sellers who don’t collect it. Indiana businesses that sell online to customers in other states care because they must comply with the expanding spectrum of varying state laws. Taxpayers should care because they are legally already obligated to pay use tax on their online purchase, whether they presently do or not, and because dwindling/unrealized revenues can spur tax increases elsewhere.

SCOTUS hearings are not broadcast. However, a recording of the oral argument will be made available the Friday following the hearing.

The Court’s decision will be made sometime before the end of June when its current term expires.

Trying to Attract the Tourists

Unique tourism campaigns are nothing new. Governing magazine recently highlighted several:

As the saying goes, if you can’t beat ’em, join ’em. That’s exactly what South Dakota did with a new tourism approach a few years ago.

After hearing from focus groups across the country that the Dakotas were nothing more than a “barren wasteland,” the state tourism agency came up with a unique campaign angle: At least we’re not Mars, an actual barren wasteland.

The voiceover in a TV ad says: “Mars. The air: not breathable. The surface: cold and barren. … South Dakota. Progressive. Productive. And abundant in oxygen. Why die on Mars when you can live in South Dakota?”

Their efforts may have paid off: The state has had a record number of tourists in the past two years. 

Instagram on the Road

Last year, Minnesota decided to tackle the perception that the state is just a cold, snowy place by bringing its attractions to you. Really.

Explore Minnesota Tourism, the state’s tourism committee, created traveling photo booths featuring two of the state’s main attractions: the First Avenue music club, which was featured in the 1984 Prince movie Purple Rain, and scenes of the Minnesota outdoors.

The state set up the booths in cities across the country, ranging from Denver to Chicago to Kansas City, and modeled them after Instagram to encourage people to share their photos on social media.

The Prince booth came complete with a fog machine, purple lighting and a drum kit, while the other booth featured a canoe and a machine that generated morning mist and bird calls.

Come Get an Operation

San Diego doesn’t need to do much to convince people to visit: It has legendary beaches, a world-famous zoo and plenty of sunshine. Even so, the city is now betting it can convince tourists to get that elective surgery they’ve always wanted in between getting a tan or frolicking on the beach.

In 2017, city leaders launched DestinationCare San Diego, a public-private partnership to get more tourists to think of San Diego as a place to get medical care — and recover afterwards. The city hopes to compete with world-renowned medical destinations like the Mayo Clinic in Minnesota or the Cleveland Clinic in Ohio.

The city does have a strong medical sector. It’s home to the University of California health systems and Rady Children’s Hospital, which is ranked one of the best children’s hospitals in the country.

Small Business Tax Rankings Released

The “Small Business Tax Index 2017: Best to Worst State Tax Systems for Entrepreneurship and Small Business” ranks the 50 states according to the costs of their tax systems for entrepreneurship and small business.

View an interactive U.S. map of “Small Business Tax Index 2017” results.

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship (SBE) Council and author of the report, said: “While there is much discussion in Congress and the Trump administration about making the federal tax system more competitive, these issues obviously reach down to state and local levels as well. That’s the focus of SBE Council’s ‘Small Business Tax Index 2017.’ Specifically, which states are among the least burdensome in terms of taxes, and which inflict the weightiest burdens on small businesses?”

The SBE Council pulls together 26 different tax measures, and combines those into one tax score that allows the 50 states to be compared and ranked. Among the taxes included are income, capital gains, property, death, unemployment, and various consumption-based taxes, including state gas and diesel levies.

According to the “Small Business Tax Index 2017,” the 10 best state tax systems are: 1) Nevada, 2) Texas, 3) South Dakota, 4) Wyoming, 5) Washington, 6) Florida, 7) Alabama, 8) Ohio, 9) North Carolina, and 10) Colorado.

The bottom 10 include: 41) Connecticut, 42) Oregon, 43) New York, 44) Vermont, 45) Hawaii, 46) Iowa, 47) Minnesota, 48) Maine, 49) New Jersey, and 50) California.

Since last year’s report, several states have made significant tax changes.

Five states – Arizona, Indiana, New Hampshire, New Mexico, and North Carolina – have improved their tax climates by reducing their personal or corporate income tax rates. Other states – such as New Mexico and Tennessee – have scheduled changes that will improve their tax climates for entrepreneurship, business and investment in coming years. Unfortunately, all of the news is not good. Kansas, Maine and New York have made tax changes that are negatives.

Waiting … and Waiting on a Highway Funding Fix

30449450Federal highway funding is running low. Nothing new there. The Indiana Chamber, and many others, have called for long-term solutions from Washington instead of short-term fixes that simply extend the uncertainty.

How are states reacting to the current dilemma. According to the Kiplinger Letter:

  • Arkansas, Georgia, Wyoming and Tennessee have postponed 440 projects totaling more than $1.3 billion
  • Iowa, South Dakota and Utah have increased gas taxes. Others that may follow include Georgia, Idaho, Minnesota, Nebraska and South Carolina
  • Seeking funds from advertisers: Virginia sells space on highway rest stop signs to GEICO; Travelers Marketing sponsors highway patrols in Massachusetts
  • Partnering with private investors: Florida is seeking private funds to rebuild portions of Interstate 4; New Jersey, Pennsylvania and Virginia are seeking similar ventures

Kiplinger editors add:

But states can only do so much on their own. Ultimately, Congress must act. Odds favor another temporary fix this fall. A long-term solution will likely wait until 2017. Congress and a new president will have a fresh opportunity to tackle broad tax reform, including a possible hike in federal fuel taxes, which no longer approach what’s needed to pay for highway work.

Not what many want to hear in terms of the time frame.

Poll: We’re Striving to Thrive But Falling Short

Gallup is certainly one of the kings when it comes to the polling world. Its latest effort, the Gallup-Healthways Well-Being Index, seems to require a bit more interpretation than most.

Respondents were asked to rate their lives today and their expectations for their lives in five years. The answers lead to classifications of ‘thriving," "struggling" or "suffering." Indiana finds itself on the bottom 10 list of states with the lowest percentage of residents thriving.

Biggest improvement from 2011 to 2012: South Dakota, third overall; biggest drop over the last year: Alaska. In somewhat of a contrast, South Dakota was also among the four states (with Wyoming, West Virginia and Vermont) that are "least optimistic" about five years from now compared to today. In the "most optimistic" category for five years hence, honors go to Louisiana, Georgia, Texas, Florida, Ohio (breaking the Southern monopoly) and Hawaii.

Top 10 "thrivers" in 2012: Hawaii, Utah, South Dakota, Maryland, Texas, New Hampshire, Nebraska, New Mexico, Colorado and Minnesota. The bottom 10: West Virginia, Maine, Delaware, Nevada, Oregon, Tennessee, Kentucky, Ohio, Indiana and Florida.

What does it mean? In Gallup’s words:

Gallup’s research has shown that people take a variety of factors into account when rating their lives. While this thriving measure doesn’t always align perfectly with macro-level trends on economic indicators such as economic confidence and job creation, it is known to correlate with personal factors in one’s own life including career, social, physical, financial, and community wellbeing. To that end, the states that do best overall in "thriving" are similar to those best positioned for future livability based on a variety of factors encompassing economic, workplace, community, and personal choices. As such, it remains clear that a broad-based approach will likely fare best in terms of improving how residents rate their lives and their level of optimism for the future.

 

Gigerich Breaks Down U.S. Chamber Enterprising States Report

Larry Gigerich of the highly respected site selection firm Ginovus penned a column for Inside INdiana Business, in which he relays and analyzes a recent report from the U.S. Chamber of Commerce (to whom we have no direct affiliation) listing the top enterprising states. Interesting stuff:

The Chamber breaks policies down into five major areas.

1. Exports and International Trade
2. Entrepreneurship and Innovation
3. Taxes and Regulation
4. Talent Pipeline
5. Infrastructure

The report combines metrics for the different policy areas to measure performance, which has allowed the Chamber to evaluate the top states based upon quantifiable measurements. Please find below a list of the measurements used to rank the states.

1. Long-term job growth
2. Short-term growth
3. Overall expansion of gross state product
4. Productivity – state output per job
5. Productivity growth – growth in output per job
6. Income growth – growth in per capita personal income
7. Livability – median income of four-person households, adjusted for state cost of living

Based upon the metrics used by the U.S. Chamber of Commerce, here are the top performing states and a brief summary of why they rank in the top 10.

1. North Dakota: The state ranked in the top 10 in six of the seven measurements. The state ranked first in short-term jobs, long-term jobs, gross state product and per capita personal income. The energy boom in the western part of the state has led the growth of the economy in the state.

2. Wyoming: The state ranked in the top 5 in five different categories. The state is second on long-term job growth and gross state product and third in productivity growth and income growth. Energy, chemicals and metals helped drive the performance of the state’s economy.

3. Virginia: The state has the highest income in the nation, after adjusting for cost of living. In addition, Virginia ranks in the top 25 in all seven categories. The state’s growth in professional services and information technology jobs has helped led to excellent results.

4. Alaska: The state ranked in the top 8 in three key areas: overall productivity, long-term job growth and gross state product. Alaska’s economy has been driven by energy, mining and tourism activities. The growth of these sectors has led to the significant growth of retail support entities in the state.

5. Maryland: The state ranked in the top 25 in all seven measurements. Maryland ranked the highest in adjusted family income, followed by productivity growth. The growth in government jobs in the Washington D.C. area, high technology growth and corporate headquarters helped to propel the state.

6. Texas: Texas ranked second in short-term job growth and fifth in long-term job growth. In addition, the state fared well in the growth of gross state product. Its energy sector, affordability, and business climate fueled economic growth throughout Texas.

7. South Dakota: The state ranked fourth in growth in gross state product and per capita income. Long known for its back-office finance operations due to its well educated workforce, South Dakota can credit growth in manufacturing and professional services for propelling its economy today.

8. Washington: The state of Washington jumped five spots from 2011 largely due to rapid short-term job growth. In particular, aerospace and transportation equipment manufacturing has been growing rapidly. Professional services and technology have also been growing significantly.

9. Iowa: The state ranked fifth in growth in economic productivity, sixth in per capita income growth and eleventh in gross state product. Iowa’s finance and insurance industries have grown by nearly 30 percent. Transportation and warehousing are also growing rapidly.

10. New York: The state ranked in the top 25 in six of the seven measurements. The state jumped eleven spots in this year’s rankings due to the rapid growth of gross state product and per capita income. The rebound in the financial services sector, coupled with the growth of educational entities have assisted New York in these rankings.

Breaking Down Incomes by County in Indiana and the U.S.

There are approximately 3,000 counties in the United States. The "approximate" comes from whether you include Louisiana parishes and Alaska boroughs in that total. Delaware has the fewest counties (3) and Texas the most (254).

How much money can you expect to make (or at least what is the per capita personal income) if you live in a particular county? The Governing web site has compiled data from the Bureau of Economic Analysis, with a map that shows 1990, 2000, 2009 and 2010 income figures for each county — and that’s a lot of county shapes and numbers.

The top five U.S. counties with the highest per capita personal income:

  1. New York (New York): $111,386
  2. Teton (Wyoming: $94,672
  3. Marin (California): 82,936
  4. Sully (South Dakota): 80,165 (an increase from $26,832 in 1990)
  5. Alexandria (Virginia): $79,967

Check out the totals for the 92 counties in Indiana and beyond on the interactive map.

Double the Taxing ‘Pleasure’ on April 17

There’s something ironic (not pleasant, but ironic) about Tax Freedom Day this year occuring on April 17 — the same day taxes are due. The day, according to the Tax Foundation, is when people finally work long enough to pay their taxes for the year.

The latest Tax Freedom Day took place on May 1, 2000. With the economy booming that year, Americans paid 33% of their total income in taxes. A century earlier was more pleasant with "freedom" arriving on January 22, 1900.

State tax burdens vary the tax timeframe. Indiana residents will "celebrate" on April 14, which ranks 26th nationally. As for the best of 2012:

  • Tennessee, March 31
  • Louisiana and Mississippi, April 1 (no foolin’)
  • South Carolina, April 3
  • South Dakota, April 4

And the worst:

  • Connecticut, May 5
  • New Jersey and New York, May 1
  • Washington, April 24
  • Wyoming and Illinois, April 23

A Turn of Luck for the Gaming Industry?

Business and consulting firm Rubin Brown issued a release last week asserting the American gaming industry has seen a slight boost of late. However, note toward the end of the statement that Indiana gaming saw a slight downturn in 2010. Hopefully, 2011 will be a different story:

The nation’s gaming industry stabilized in 2010 with a slight increase in adjusted gross revenue (AGR) of 0.34 percent over 2009. This was the first time the industry has seen an increase in revenue since 2007 reports RubinBrown, one of the Midwest’s largest accounting and business consulting firms.  Commercial  and Tribal Gaming Stats 2011, available at http://www.rubinbrown.com, pools 2010 data from 448 commercial land-based and riverboat casinos in 14 states with legalized gambling. Data was compiled from state gaming regulatory authorities and the American Gaming Association.

From a regional perspective, the Midwest held steady again in 2010, with the five Midwest states referenced in the report comprising 25 percent of 2010 AGR of the 14 states with commercial gaming. Gaming in the Midwest experienced a $21 million decline in revenues during 2010, which is much improved compared to the $74 million decline in 2009. Missouri and Colorado were the only two Midwest states to see a boost in gaming revenue, with 3.35 and 3.4 percent increases respectively. Other states to see an increase in revenue include Pennsylvania, which led the nation in revenue growth with a drastic 26 percent increase; Nevada, which, although the state only saw a slight increase of 0.12 percent, is faring better than the double digit decrease it saw in 2009; and South Dakota, which experienced a moderate increase of 3.92 percent.

Missouri continues to lead the Midwest in casino revenue growth, bringing in over $1.7 billion in revenue and more than $450 million in commercial gaming tax revenue in 2010. Due to the opening of the River City Casino in St. Louis in early 2010, the St. Louis region increased its AGR by 7.52 percent to lead the market in Missouri, comprising nearly half of state-wide revenue. The Kansas City region followed behind with almost 40 percent and other communities in the state made up the remaining 10 percent. However, with the surrender of St. Louis’ President Casino license and the development of the Isle of Capri Casino in Cape Girardeau, which is expected to bring in over $67 million in new gambling revenues, these breakdowns may change in 2012.

Colorado, the only other state to see an increase in AGR, experienced an increase of $25 million during 2010 and generated more than $107 million in commercial gaming tax revenue. The passage of Amendment 50 by Colorado voters in 2009, which allowed the maximum bet at casinos to be raised from $5 to $100 and permitted properties to remain open 24 hours a day, can be attributed as one of the main causes for Colorado’s revenue increase in 2010.

The report credits the slight increase in overall gaming revenues to the continued economic recovery throughout the nation. Although operators have felt the impact of the Great Recession with reduced consumer spending, mergers, bankruptcies, strict lending requirements and stalled capital projects, the rebound for the gaming industry is starting to occur.

“Gaming continues to expand through changes in gaming legalization, updates in technology and expansion into new markets,” said Chelle Adams, partner-in-charge of RubinBrown’s Hospitality and Gaming Services Group. “One of the trends that we’re currently seeing and expecting to see more of in the next few years is an expansion of non-gaming amenities at casinos, such as entertainment venues, restaurants, spas and golf courses. These additions are being utilized to draw patrons to the casinos’ complete destination experience as several patrons are cutting back on traveling and vacations.”

Despite the growth in Missouri and Colorado, not all Midwest states experienced similar success in 2010. Indiana saw its gaming revenues decline again by a slight 1.27 percent and overall admissions decreased by 0.4 percent, a significant change from the 4 percent increase in 2009. Although AGR and admissions declined in 2010, 1.59 and 3.59 percent respectively, Iowa-based casinos saw patrons spending more per trip on average from the previous year.

Indiana’s Business Tax Climate: Not a Perfect One, But a Good 10

We’re No. 10! We’re No. 10! Not exactly the rallying cry one is used to hearing, but a refrain that deserves more plaudits than usual. Here’s why Indiana’s ranking in the Tax Foundation’s 2011 State Business Tax Climate Index is noteworthy:

  • It’s not easy to make substantial improvements in this area. Indiana has ranged between No.12 and No. 14 over the last five years
  • The top eight seemingly head the list by default as they do not impose one of the big three taxes (sales, income or corporate income). So, without too much of a stretch, you could say Indiana is second on the list
  • We’re far away from the bottom 10; in order from No. 50, that’s New York, California, New Jersey, Connecticut, Ohio, Iowa, Maryland, Minnesota, Rhode Island and North Carolina

The Indiana Chamber’s advocacy efforts certainly are contributing factors to the state ranking. Historic tax restructuring in 2002 (including elimination of the inventory and corporate gross receipts levies) is among the Decade of Policy Victories document reflecting major legislative accomplishments from 2000-2009. The Chamber has also achieved success in general property tax reductions and an expansion of a variety of tax credits (good for business, but not earning high marks in this report).

According to the Tax Foundation, the worst tax codes tend to have:

  • Complex, multi-rate corporate and individual income taxes with above-average tax rates
  • Above-average sales tax rates that don’t exempt business-to-business purchases
  • Complex, high-rate unemployment tax systems
  • High property tax collections as a percentage of personal income

Indiana’s rankings in the five categories are: corporate tax index, 21st; individual income tax index, 11th; sales tax index, 20th; unemployment insurance tax index, 12th; and property index, 4th.

Since this tax analysis game is not for the faint of heart, a little more from the Tax Foundation on how it all works.

The methodology of the State Business Tax Climate Index is centered on the idea of economic neutrality. If a state’s tax system maintains a “level playing field” for businesses, the index considers it neutral and ranks it highly. However, each state’s final score depends on a comparison with the other 49 states.

The overall index is composed of five specific indexes devoted to major features of a state’s tax system. Each of these five indexes is composed of several sub-indexes.

Each state’s laws and tax collections were assessed as of July 1, 2010, the first day of the 2011 fiscal year. Newer tax changes are the subject of commentary in an appendix but are not tallied in the scores and rankings.

The Tax Foundation has data charts, further analysis and a full 60-page report. By the way, you have to go west for most of the rest of the top 10 (in order): South Dakota, Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware and Utah.

And finally, going into a state budget year that will bring pressure to raise revenues, let’s all keep the vital importance of the tax climate in mind on business attraction and expansion decisions.