Wisconsin May Cut Income Tax Rates to Offset Rise in Online Sales Tax Revenues

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Income tax filers in Wisconsin may soon reap benefits from a recent U.S. Supreme Court decision requiring that more out-of-state online retailers collect and remit sales taxes on purchases.

Remote sellers that conduct at least 200 annual transactions – or annual sales topping $100,000 – in Wisconsin will have to collect state sales taxes, the court ruled recently in South Dakota v. Wayfair Inc. The ruling in June overturned a previous high court decision that said such taxes need not be collected by online retailers unless they had a physical presence in the state where they were doing business.

In a report sent to members of the state legislature, the Wisconsin Legislative Fiscal Bureau pointed out that current state law may require the additional sales tax revenues received as a result of the court decision be used to reduce income tax rates. Under that scenario, the average Wisconsin income tax filer would see a tax reduction of $52 annually, according to the bureau’s report.

That idea now has the endorsement of Gov. Scott Walker.

"Gov. Walker wants to return any additional revenues to the hardworking taxpayers," the governor’s spokeswoman, Amy Hasenberg, told Watchdog.org in an email.

Whether income tax rates would be reduced to compensate for the anticipated rise in sales tax revenues, however, is still under review, according to Patricia Mayers, spokeswoman for the Wisconsin Department of Revenue. The state will not need to pass additional legislation to begin collecting the additional revenues from online retailers, Mayers said.

"Wisconsin will require collection beginning on Oct. 1, 2018, consistent with existing Wisconsin statutes, which require all sellers to collect sales or use tax unless limited by federal law," she said in an email to Watchdog.org.

The state expects to receive about $120 million per year as a result of the Wayfair decision, according to Mayers. A federal Government Accountability Office report released last year concluded that Wisconsin could net between $123 million and $187 million annually if states were given additional powers to collect sales taxes on remote transactions.

The Legislative Fiscal Bureau report said it was unclear whether Wisconsin could require out-of-state vendors to remit sales taxes owed to the state without changes to existing state laws.

The state Department of Revenue characterized the court decision as one that would help level the playing field for brick-and-mortar stores and online retailers that have had the advantage of less overhead.

"Wisconsin businesses, especially Wisconsin small businesses, will no longer be operating at a competitive disadvantage to out-of-state competitors that will now be required to collect the tax," a department news release states.

Cory Fish, director of tax, transportation and legal affairs for Wisconsin Manufacturers and Commerce, said the vast majority of WMC members have a physical presence in the state and thus already pay sales taxes on transactions. The court ruling will help traditional retailers in the state compete with their online counterparts, Fish said.

"I think Wisconsin is doing it right with an offsetting tax decrease," he told Watchdog.org.

Businesses should benefit from any income tax reduction because 90 percent of them are pass-through entities that pay personal income taxes, Fish said.

Online retailers will need access to workable software that allows them to more easily collect and remit sales taxes in the states where they do business, he said.

"Once implemented, it won’t be a major burden," Fish said.

It’s unclear if the Supreme Court ruling would encourage the formation of more very small businesses that might be able to take advantage of the sales tax exemptions, he said. Even small start-ups have $500 million in revenue and thus require sales tax collection, according to Fish, adding that firms covered by the exemption would be mom-and-pop operations.

"It must be more of a side business rather than your profession," he said.

Vicki Markussen, executive director of the La Cross Area Chamber of Commerce, said her chamber is currently aiding members that did not previously collect the sales tax to set up accounting procedures to track and pay state sales taxes when required.

It’s doubtful that more very small online firms will be created to take advantage of the exemptions affirmed by the court, according to Markussen.

"I don’t believe we will see new small businesses start up to take advantage of the sales tax exemption because that wasn’t a deterrent before the ruling," she said in an email to Watchdog.org.

The La Cross chamber has been lobbying federal officials for several years to mandate the collection of sales taxes by online sellers, Markussen said. One strong voice in this effort was La Cross businessman Dan Wettstein, who this summer announced that he would close his electronics and furniture store due to competition from online sellers that did not have the same overhead.

"Sadly, within three weeks of the online sales tax ruling, Wettstein announced the closing of his businesses," Markussen said. "This change happened too late."

The state might do better by using the anticipated increase in sales tax revenues for public-sector needs rather than reducing income tax rates, she said.

"Communities outside of the three large population bases [Milwaukee, Madison and Green Bay] are hurting desperately for transportation funding relief," Markussen said. "With additional revenue coming in, it would plug a very big hole in our state transportation budget."

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