The year was 1992. Flannel, babydoll dresses and Doc Martens boots were cool (or so I heard—I was nine). Whitney Houston belted out a version of Dolly Parton’s “I Will Always Love You.” MTV strayed for the first time (but clearly not the last) from its platform of running music videos 24/7 with the release of the first season of the reality show The Real World. Most computers at the time were still running DOS. And Bill Clinton, who would be elected President that year, would be quoted saying, “I did not inhale.”
It was also the year that the United States Supreme Court in Quill Corp. v. North Dakota reaffirmed that a state couldn’t require a company that lacked a physical presence in the state to collect and remit sales taxes.
We didn’t know what a huge thing the internet and e-commerce would be or how quickly it would take over our daily lives. In 1992, the “world wide web” had only been around for a couple of years at most, and no one was making online purchases (Amazon was started in 1995 as an online bookstore). Customers would occasionally buy things through mail orders and catalogs, but nothing was as easy as it is today—with the ability to save a credit card and ship to home with a single click.
Things have clearly changed.
With the explosion of online retailers and e-commerce, states lost out on a significant amount of revenue. The most recent estimates from the Department of Treasury pegged Michigan’s lost sales tax revenue at roughly $450 million, most of which is attributed to e-commerce. Instead, taxpayers were supposed to compute and/or estimate the taxes they should have paid on out-of-state purchases and pay it with their annual income tax returns; not shockingly, this honor system hasn’t worked well.
Nearly half of the states in the nation, including Michigan, joined an agreement to overcome some of the complexities in the 1992 court case by standardizing definitions and simplified collection. Additionally, since 2008, most states have expanded their own sales tax laws to attempt to pull some out-of-state retailers under their jurisdictions—these have often been called “Amazon laws” after the retailer, or laws dealing with economic or affiliate nexus. Michigan passed one of these laws in 2014, which took effect in October of 2015.
However, because it only applied to very specific retailers, it still only resulted in the influx of about $50-60 million, or less than 15% of the uncollected revenues.
The Internet is clearly changing things.
Earlier this year, the U.S. Supreme Court reversed its stance on e-commerce sales taxes. The Court acknowledged in South Dakota v. Wayfair, Inc., that the “Internet’s prevalence and power have changed the dynamics of the national economy,” and even stated that the “Quill Court did not have before it the present realities of the interstate marketplace.” Following this ruling, Michigan’s Department of Treasury announced it would start taxing out-of-state sellers who have at least $100,000 in total sales to the customers in the state or 200 Michigan transactions, which was the same standard the South Dakota law set, beginning on October 1, 2018.
This will mean at least $200 million in much needed new revenues coming to the state.
While this will likely spur conversations as to what we should spend the new revenues on or whether we even need the new revenues (I can tell you for certain, yes we do), and while there may need to be follow-up legislation to clarify the tax treatment, I can tell you I welcome the challenge and the change.
The fact is, we’ve come a long way from 1992, and that’s the way it should be.
***And just to clarify, this isn’t a new tax. Like I said above, you’re already supposed to pay use tax on your income tax forms for things you buy from remote sellers. This eases compliance as sales taxes will be collected on many of the things we buy online.