In North Carolina, as the anticipated $400 million windfall expected by supporters of the new internet sales tax has failed to materialize.
Don’t count us among those who are disappointed. Last summer we urged policymakers to be cautious and restrained in their actions following the U.S. Supreme Court’s decision in South Dakota v. Wayfair, the June 2018 ruling that allowed states to implement taxes on previously off-limits out-of-state businesses.
Despite our call for thoughtful discussion with legislators, aimed at enacting legislation that ensured the internet tax didn’t take a bigger bite out of North Carolinians’ wallets, the state’s revenue department forged ahead unilaterally.
Prior to the court’s decision in Wayfair, states were only able to assess sales tax collection liability on businesses that had some form of physical presence within their state. Wayfair established a precedent that states could assess collection liability so long as the business exceeded certain transaction thresholds.
Without debate, North Carolina rulemakers simply adopted the approach the Supreme Court ruled was acceptable for South Dakota. There was no public analysis of how, or even whether, to move ahead.
Now we know our state’s new tax will generate just 30% of what its supporters forecast. It raises questions about the Department of Revenue’s reasons for acting and the potential for a legal challenge.
Every North Carolinian is expected to pay sales tax, but state law defines the items or services on which that tax is to be paid. In the case of North Carolina’s internet tax, only a September 2018 bureaucratic directive from a state agency — not a law crafted, debated, and passed by the legislature — binds the businesses to a collection duty. That’s a lawsuit waiting to happen.
Worse, North Carolina’s rules are not as comprehensive in protecting taxpayers and businesses as they could have been and should have been. The burden of new tax compliance obligations falls most heavily on small and medium-sized businesses. While most larger retailers already had physical presence in the state, in the form of warehouses or retail outlets, new tax laws being passed across the country mean that small businesses may eventually have to cope with as many as 12,000 sales tax jurisdictions nationwide. That’s created real problems.
Not only are smaller retailers facing a sudden jump in compliance obligations, but they are also less equipped to deal with compliance. Without armies of lawyers on staff, tax compliance is disproportionately expensive. A 2014 study by the National Association of Manufacturers found that tax compliance costs roughly $1,500 per employee for businesses with fewer than 50 employees, but under $700 per employee for businesses with 100 or more employees.
Democratic Gov. Roy Cooper’s proposed operating budget for the new year makes it clear how overblown internet sales tax projections were. He included just $70 million from a post-Wayfair bump.
Asked about the impact of Wayfair, the Office of State Budget and Management stated that North Carolina would receive $70 million this fiscal year and $130 million next year from the new internet sales tax. Future revenues would grow at the same rate as other taxes, meaning this is not a question of a tax that’s simply slow to ramp up.
North Carolina legislators still have an opportunity to make a course correction. They can stop the Department of Revenue from imposing arbitrary rules on companies. Out-of-state firms could also sue the state over the excessively broad law or arbitrary standard for compliance. Until then, North Carolina provides a cautionary tale for other states who will likely find the same underwhelming revenue compared to predictions.
Joseph Coletti is a Senior Fellow with the John Locke Foundation and Andrew Wilford is a Policy Analyst with the National Taxpayers Union Foundation. This piece does not necessarily express the position of the John Locke Foundation.