Texas state agencies were ordered Friday to cut 10 percent from their supplemental budgets next year, just a day after the U.S. Supreme Court issued a ruling that may result in an unexpected billion dollar windfall in state revenue. The governor’s budget director and the Legislative Budget Board—made up of statewide elected officials to oversee the state’s $217 billion budget—directed state agencies to prepare supplemental budgets that reflect the cuts in 2.5 percent increments. “While the state’s economic landscape is positive and a balance is projected to accrue in the treasury, agencies are directed to be vigilant in their spending and continue to be responsible stewards of state resources,” the agencies were told.
The news comes as state officials determine the impact of a major reversal of law by the U.S. Supreme Court announced Thursday that will allow states to force online retailers to collect sales tax on purchases. The high court’s decision is an about-face on a decades-old ruling that essentially prohibited states from ordering tax collection from online companies that had no physical presence in the states. Thursday’s ruling could mean as much as $1.1 billion in new revenue to Texas alone, early estimates suggest.
But in the often perverse calculus of modern day politics, the move to go after that billion dollar pot of money may not be as easy as it seems. That’s because lawmakers will likely confront the notion of creating a new tax that consumers will ultimately pay and that future political opponents will exploit in elections down the road. While officials with the Texas Comptroller’s Office, the agency that collects taxes, are still sorting out the implications of the Supreme Court ruling, at least one key lawmaker believes new legislation will be necessary to begin the process of demanding sales tax from online retailers.
“We view it as a net positive,” Kevin Lyons with the state comptroller’s office said of the Supreme Court decision. “More state sales tax revenue means more money in the state coffers to help us fund state services.” But the vice chairman of the Senate Finance Committee said a lot of forces stand between the promise and realization of a new revenue stream. “It’s never an easy process to pass legislation, and especially any legislation dealing with taxes,” said state Senator Juan “Chuy” Hinojosa, a McAllen Democrat. “Obviously we’ll have people who will say, ‘that’s an increase in price on goods that people have to pay,’ and to a certain extent, that is true.”
The state’s business community—which has long lamented what they call an unfair advantage by untaxed online retailers—is a likely and strong ally in favor of any potential new tax legislation, Hinojosa said. But the opposition, including the well-funded online retailers and some members of Congress who believe it is their purview to create this type of legislation, could be just as potent in a legislative fight. And Hinojosa warns the scales are always tipped against any new tax legislation.
The Supreme Court case, South Dakota v. Wayfair, ended with Justice Anthony Kennedy’s writing a majority opinion to overturn a ruling from an earlier case, Quill Corp v. North Dakota (Quill), in which the Supreme Court held that states could only require a company to gather and submit sales tax on its transactions if it maintained an in-state physical presence. Justice Kennedy referred to this stipulation as an “arbitrary formalistic distinction” in his South Dakota ruling. Quill still allowed states to tax transactions from these online retailers; it just left the responsibility of submitting those taxes to the buyers themselves, making sales tax collection a logistical nightmare for state governments. As a result, state governments generally don’t collect sales taxes on these online transactions at all.
Companies like Walmart, Target, and Amazon all keep physical locations in Texas, so the state government already requires them to submit taxes from their online transactions within the state. Companies like Wayfair, Etsy, Newegg, and Overstock, who do not own in-state locations, and now face tax collection requirements in many states—and possibly in Texas. In a 2014 hearing with the Texas House Ways and Means Committee, the Texas Comptroller’s Office estimated the state could collect $800 million annually by taxing online retailers. That number is believed to have risen since then with the growth of online commerce in recent years.
Texas, like South Dakota, does not have a personal income tax, so this case means a significant boon to the state’s tax base. In a large, economically vital state like Texas, this increase in tax revenue can be considerable. “The economy here is booming,” said Lyons, who then pointed to the $2.76 billion the state collected in sales tax revenue in May. That number could only rise if the South Dakota decision begins to take effect.
“In every budget cycle for the last couple of sessions, we’ve been short on funding,” said Hinojosa. He agrees with the ruling, both practically and idealistically, and he hopes to see it make an impact in Texas, especially in a time when the state budget is in question. Texas was one of 35 states that signed a friend of the court brief calling on the Supreme Court to end it’s “physical presence standard.” Even so, there are Texans who disagree with the court’s decision, most notably U.S. Senator Ted Cruz, who signed on to an opposing friend of the court brief with two other senators in opposition to the move. According to the brief, the South Dakota ruling acts where Congress should have authority. “Overturning Quill would thwart ongoing congressional efforts to find a workable solution on the remote sales tax issue,” says the brief.
The brief also contends that uncertainty caused by the type of decision the high court ultimately made would burden small online retailers without the resources or time to research and comply with the individual tax codes across the country. Texas alone contains over 1,200 municipalities, all of which may contain differing sales tax rates. Those small online retailers will likely make a political presence through companies like ebay, which has spoken out against the ruling. Even with strong Republican opposition to the ruling at the federal level, Hinojosa says he doesn’t see the issue breaking along party lines in the Texas Legislature. In essence, he sees the divide more practically: consumers and online retailers vs. local business. For now, the way forward for Texas is unclear. The state will have to review the particulars of the decision, and formulate a strategy if it intends to pursue the revenue. Whether Texas lawmakers can come together and pass such legislation is the billion dollar question.