The U.S. Supreme Court delivered a decision this month that puts brick-and-mortar businesses on a more level playing field with online retailers and offers Georgia lawmakers a chance to better meet the needs of the state’s people and communities. The decision could lead to a somewhat sizable influx of sales tax revenue for both the state treasury and city and county bank accounts, especially in the long-run. This can provide a needed boost at a time when policymakers are struggling to meet the needs of a growing population and when Georgians are under threat from deep cuts in crucial federal programs that provide health care and food assistance. The decision can also help Georgia to lay the foundation for a more durable revenue system overall, putting additional investments such as access to college and affordable child care within reach.
In the case known as South Dakota vs. Wayfair, the Court repealed some obsolete rules that prevented the nation’s state and local governments from collecting sales taxes already owed on many purchases made over the internet. Ushered into place by a 1992 court decision based on the mail order catalog business, the prior rules only allowed sales tax collection from retailers with a sufficient physical presence within a state, such as a warehouse or storefront. In practice, this meant that small businesses and larger chains like Target and Best Buy with a brick-and-mortar location had to remit state and local sales tax, while fully online sellers like Overstock and Wayfair did not. The country’s largest online retailer, Amazon, resisted including sales tax on purchases for many years but as of 2017 started collecting them in every state.
The old rules weren’t a very big deal in the early days of the internet but created an increasing imbalance once online commerce exploded over the last two decades. The inability to apply sales taxes to the fast-growing market of online purchases put main street businesses at a distinct disadvantage by making it cheaper for shoppers to buy online. It also contributed to shrinking sales tax revenues in Georgia and nationwide, undermining lawmakers’ ability to invest in ladders of opportunity like higher education or key infrastructure needs including transportation.
Online purchasers were always supposed to pay state and local sales taxes, a requirement known as a use tax. But few people followed that rule and previously state revenue agencies lacked the ability to enforce it. Now the Supreme Court’s decision makes it possible for Georgia and other states to do so after they institute specific administrative procedures and safeguards for small sellers.
Georgia is already one step ahead of many states after the passage of House Bill 61 during this year’s legislative session. The new law establishes a straightforward system for Georgia to collect the new sales tax revenue and distribute it between the state treasury and local governments accordingly. Online sellers who make at least $250,000 in sales or 200 individual sales a year in Georgia must either collect and remit to the state sales taxes on purchases or send tax due notices each year to customers who spend at least $500 on their websites.
Estimates on the scope of the potential revenue gain vary, and some technical questions for how state and local agencies will collect the new revenue introduce more uncertainty. The additional revenue for state and local governments could be as low as $232 million a year, according to a 2017 report from the Government Accountability Office (GAO). On the higher end, an official cost estimate generated by state experts in 2017 indicates the changes could generate as much as $1.6 billion in new state revenue over the next five years and another $1.2 billion in local revenue. That puts the combined annual collection at $572 million on average over the next five years.
Supreme Court’s Online Sales Tax Collection Decision Could Generate Sizable Revenue
|Estimate state revenue change from House Bill 61|
|Potential gain from online sales tax collection||2019||2020||2021||2022||2023||5-Year Total|
|Combined Georgia Revenue||$480||$523||$570||$621||$666||$2,860|
Source: GBPI analysis of fiscal note for HB 61 (LC 43 0543S) dated 2.13.2017. Lawmakers did not commission an updated fiscal analysis of the bill during the 2018 session. *The state did not include estimates for 2023 in its official fiscal note, so estimates for that year reflect a simple forward projection of the prior trend.
Some lawmakers might feel pressure in the coming years to offset this revenue increase, in order to avoid any public perception of a tax increase. But state legislators and local officials would be wise to proceed cautiously to evaluate the new system’s results.
Georgia’s sales tax collections flatlined over the past decade due to several factors, often increasing local governments’ reliance on other revenue sources like property taxes and fees and making it harder for them to fund core services. Georgians also might need to offset deep cuts in federal support for programs including food assistance and health care, which could soon shift costs to the state and local level.
Georgia continues to be a low tax state overall, ranking 42nd on a commonly used measure of state and local taxes as a share of personal income. The new revenue from online sales tax collection shouldn’t change Georgia’s status relative to other states much, since the Supreme Court decision applies nationwide. The additional tax bill will also be modest for most regular Georgians, averaging out to about $54 per person each year. The actual total will probably be smaller for working class Georgians and people on fixed-incomes, who tend to spend a greater share of their income at local shops and restaurants.
But while the tax uptick for most consumers is likely small, the benefit to communities and vital public services could prove large. For years, Georgia lawmakers struggled to get back on sound footing following budget crisis wrought by the Great Recession, leading to deep cuts in K-12 education and stifling investments in access to college and child care. Local governments meanwhile juggle a range of community priorities, from transportation to housing to public safety.
An influx of revenue from online sales tax collections can provide Georgia’s policymakers a welcome boost in their efforts to better pay for the services people need, at a miniscule cost to most constituents. New public investments are an essential ingredient for Georgia to build a stronger, fairer economy that provides broad-based prosperity for the long haul. The Supreme Court’s decision last week gives lawmakers a great chance to take that path, so long as the resulting revenues aren’t squandered through any hasty cuts in other taxes.
*This blog was updated July 3 to incorporate a change to a date and to add the cost estimate from the Government Accountability Office (GAO).”