Online Sales Tax

What Will the Legislature Do with the Additional Revenue from Online Use Taxes?

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The Mississippi Legislature could face a huge question on what to do with internet sales tax revenue when it returns either for a special session in August or for its regular session in January.

The recent U.S. Supreme Court decision in South Dakota v. Wayfair opens the door for Mississippi to levy its use tax on all internet sales. According to state regulations, this will be assessed on companies with $250,000 or more in sales.

The Wayfair ruling overturned a 1992 decision in the Quill v. North Dakota case that mandated that a company had to have a physical presence in a state (such as a warehouse, store or office) before it could be forced to collect tax on behalf of the state or a municipality.

The big question is what will the Legislature do with the additional revenue? There are calls to apply it to infrastructure such as roads and bridges. Right now, the use tax revenues mostly go to the general fund.

Sales tax and use tax are both assessed at the same 7 percent rate. The difference is that 18.5 percent of sales tax revenues are sent back to the municipality where it was collected. No use tax revenue is sent back to municipalities.

The problem for cities is that more and more shopping is moving online. Brick and mortar retail is losing market share annually to e-commerce and cities will start to see a bigger reduction in their sales tax revenues.

How can the Legislature address this problem? There are two solutions: Either provide some of the use tax revenue for municipalities or increase the sales tax disbursement.  (See the Clarion Ledger article from July 19, 2018)

Dividing up the use tax revenue, which was about $348 million last year and could add an additional $50 million to $75 million thanks to the Wayfair decision, would require the Legislature to devise a formula to disburse it to the municipalities.

The easiest way to make the cities whole would be to simply increase the disbursement percentage to 20 percent, as proposed by several bills in last year’s Legislative session, or more. This would be the easier solution since the formula that divides up sales tax revenue is already in place and would require only a simple adjustment.

It’d also be easy to adjust the disbursement again if sales tax revenues continue to lag in the face of e-commerce.

Whatever method the Legislature decides, municipalities need an adjustment to their revenue streams in order to continue their business of providing essential government services to taxpayers.

 

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