Online sales tax collections proving essential for many state and local governments during COVID-19

Many state and local government budgets rely heavily on sales tax collections. When the COVID-19 pandemic hit, general sales tax collections took a major hit as businesses were forced to close and in-person spending almost came to a stop.

Still, nearly a year into the pandemic, in-person sales have mostly resumed across the country but have yet to rebound to pre-pandemic levels. On the other hand, ecommerce sales have skyrocketed over the past year—hitting 44 percent growth in 2020. The pandemic has fueled a fire online as people spend most of their time at home and have increased their online purchases.

For many heavily impacted and cash-strapped state and local governments, the ability to collect sales tax on online sales has never been more important.

To put the difference in revenue collections into perspective, you can look at the state of overall general funds against online sales tax collections. According to the Center on Budget and Policy Priorities, state general fund tax collections are forecast to decline as much as 31 percent through 2022. Meanwhile, online holiday sales grew more than 45 percent during the 2020 season.

The positive impact of online sales tax on governments

Thanks to the 2018 Supreme Court decision in South Dakota v. Wayfair, states gained the ability to require businesses to collect sales tax on remote sales. Since then, 43 states, Washington, D.C., and parts of Alaska require out-of-state sellers with no physical presence to collect and remit sales tax via economic nexus laws. Almost as many states require online marketplaces to collect and remit sales tax on the sales they facilitate for third-party sellers via marketplace facilitator laws.

For state and local government revenues, the Court decision could not have come at a better time.

In Colorado and numerous other states, the pandemic-driven shift to ecommerce has helped drive retail sales, as well as online tax revenues. For some, the online sales tax explosion has helped offset significant losses, while others, like Kansas, have actually seen an uptick in overall sales tax revenue due to online tax collections.

The trends fueling online sales tax collections

While the pandemic served as a catalyst for widespread ecommerce adoption, the real change is happening in its wake. In the last year, consumer behavior was virtually forced to move toward ecommerce—something that is not likely to change.

Consumers have been prioritizing convenience when it comes to shopping for years. Due to the number of options online and ease of shopping digitally, the forced reliance on ecommerce during the pandemic has made consumers even further accustomed to being able to make purchases whenever they want and how they choose to do so.

Similarly, we’ve witnessed the significant growth of marketplaces during the pandemic. In 2020, Amazon sold an estimated $295 billion worth of products—up $95 billion year over year. The growth of marketplaces is being driven by several factors similar to those driving ecommerce adoption—convenience and options. From a sales tax perspective, the increase in marketplace sales means an increase in tax collections for tax authorities through marketplace facilitator laws.

The outlook for online sales tax

As consumer preference continues to err on the side of convenience, we should expect to see online shopping continue to grow. For state and local governments, these trends and changes will be influencing online sales tax revenues for years to come. Fortunately for revenues, ecommerce and marketplace sales show no signs of slowing.

Despite the negative impacts of the pandemic on traditional sales tax collections, the changes to consumer behavior and business operations coming out of the pandemic are creating a robust opportunity for state and local governments to continue driving revenue from online sales.

At the end of the day, online sales tax collections have been essential for many governments for a number of reasons over the past year. For some, these collections helped offset major revenue losses during the pandemic while others have been able to fund essential programs. Further, the positive impact of online sales tax collections could be growing into new jurisdictions. With hold out states like Florida, Kansas, and Missouri all considering implementing economic nexus or marketplace facilitator laws in 2021, we could see more state and local government revenues benefit from online sales tax collections moving forward.

Scott Peterson currently serves as the vice president of U.S. tax policy for Avalara. Peterson was the first executive director of the Streamlined Sales Tax Governing Board. As its COO, Peterson helped that organization make sales tax simpler and more uniform. Prior to that he spent 10 years as director of the South Dakota Sales Tax Division and 12 years providing tax policy research and legislative drafting for the South Dakota Legislature. He’s now Avalara’s go-to resource for all things related to tax policy.