“This will level the playing field between online sellers and brick-and-mortar stores,” was the phrase echoed by five state and local officials.
While implementation and regulation of the online sales tax might prove tortuous, the Supreme Court ruling could increase state and local government revenues across the country — especially in states like Tennessee that have no income tax and relies heavily on sales tax revenue. In 2015, 72.5 percent of Tennessee’s total tax revenues came from sales tax.
Before Thursday’s Supreme Court ruling, the only way a state could collect sales tax from online retailers is if the retailer had a physical presence in that particular state.
Beginning in 2014, as part of a compromise, Tennessee started collecting sales tax from online Amazon purchases because the behemoth online retailer had a physical presence in state with warehouses and distribution centers in Chattanooga, Lebanon and Murfreesboro. Walmart is another retailer that collects online sales tax because it has physical locations in the state.
Current state law already requires online shoppers to report and pay a “consumer use tax” on purchases of tangible personal property that will be used in Tennessee, but most either ignore or are unaware of the requirement.
At the March 24 Johnson City Commission meeting, Finance Director Janet Jennings spoke about how online sales have slowly deteriorated in recent years, citing online sales as the driving factor.
“(Local option sales tax revenue) is 24 percent of our general fund budget. It’s vital we continue getting that and that we continue getting growth, not just stagnant collections each year,” Jennings said at the time.
In recent years, City Manager Pete Peterson said online sales has grown “two or three” times the rate of brick-and-mortar sales.
“What this really does is it provides some fairness and equality to your local merchants. I mean you’ve got the folks that have made the investment to build a facility and employ local people. They pay property tax. They pay sales tax there. Their employees create the need for additional jobs elsewhere,” Peterson said.
“Not only that, but those local merchants are the ones who make contributions to the Red Cross, to Little League baseball, the Girl Scouts and all of those contributions that really make a community. The online retailers don’t make those contributions.
“So this is about sales tax collection, but it’s also about equality and support of those people who have businesses in our community.”
While nearly impossible to determine how much revenue Johnson City or Washington County loses to online sales, state officials estimate Tennessee loses between $200 million and $450 million annually.
In 2016, Gov. Bill Haslam proposed a rule that would require out-of-state businesses that make sales in excess of $500,000 in Tennessee to begin collecting and paying sales tax, but ultimately, that rule was put on the back burner in anticipation of the Supreme Court ruling.
Assistant Majority Leader Rep. David Hawk, who also serves on the House Finance, Ways & Means Committee, said he is confident that rule will be revisited during the next Tennessee General Assembly session.
“We’ve got legislation ... I’ll call it pending for right now. I don’t think it ever went into effect because we were waiting to see (the Supreme Court ruling). We do have a mechanism in place in Tennessee that we can begin collecting sales tax,” Hawk said.
With Tennessee in good fiscal standing, Hawk said he thinks the additional revenue could spur lawmakers to look at lowering other taxes.
“If this creates an opportunity to lower a tax somewhere else, we need to look at these possibilities, as well. I think that needs to be part of the discussion is that the potential of these new sales tax dollars could create a situation where we could lower taxes in other areas,” Hawk said.
“We’ve been trying to phase out the sales tax on food so this gives us an opportunity to work on different parts of Tennessee’s overall tax structure.”
The problem the additional revenue creates, according to Washington County Commissioner Joe Grandy, is the way those online sales tax dollars are remitted back to local governments.
Unlike the local option sales tax, which is sent back to the counties where the sales took place, Grandy said the current online sales taxes collected by retailers located in the state are remitted based on population.
“Naturally, in a more rural area like Northeast Tennessee and specifically Washington County, we get a smaller share than the more dense, heavily populated areas,” Grandy said.
“What I will be doing is working with our state legislature to make that equitable distribution based on where the product was purchased. They know exactly where it went because they shipped it there.”
While online shoppers will surely groan about paying more sales tax, Washington County Finance Director Mitch Meredith said 100 percent of those dollars, at least in Washington County, will go toward education.
“What this does for Washington County government is it provides more resources for our school system.”