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March 6, 2019

Virginia Sales Tax Law Catching up to Today’s Economy — With Possible Delays

                                                                                      Updated March 6, 2:15pm

During the 2019 General Assembly session, Virginia lawmakers passed important legislation to better align our state and local sales tax with the modern economy. Starting in July, large online retailers will collect sales tax on their Virginia sales. In modernizing the sales tax to include out-of-state online retailers, Virginia will create a more even playing field for businesses while also providing more resources to invest in public services that support families and businesses across the state.

However, the legislation includes a carve out for “marketplace facilitators” like Amazon Marketplace, eBay, and Etsy that could delay their collections requirements and could result in up to $42 million less for schools and other building blocks of our communities.

Similar authorizing language in the state budget does not include this carve-out. Since budget language takes precedence over regular legislation, depending on interpretation this may mean the carve-out is not implemented. The governor is likely to sign the bill without changes, but does have the authority to eliminate this carve out and send it back to legislators so that all retailers are playing by the same set of rules.

Under prior Supreme Court precedent, states could not require out-of-state retailers to collect sales taxes. Customers themselves were supposed to self-report and pay taxes on their untaxed catalog and internet purchases. That requirement was extremely difficult to enforce, and few people paid those taxes. This dynamic gave out-of-state online retailers an advantage over local brick-and-mortar stores and also strained state and local budgets that faced a shrinking sales tax base.

With this new legislation (HB 1722 and SB 1083), Virginia joins the growing group of states that have updated their sales tax laws in response to last year’s South Dakota v. Wayfair, Inc. Supreme Court decision. For large online retailers and marketplaces, the new law moves the responsibility for sales tax collection from the customers to the retailers or marketplace. The new law is expected to bring in an additional $155 million next year for Virginia’s state and local governments and regional transportation funds. This amount is expected to grow over time due to continued growth in e-commerce sales. A large share of the new state revenue is dedicated toward K-12 education and transportation.

Unfortunately, the legislation includes a provision that allows large marketplace facilitators to apply for a 90-day suspension or delay from meeting the bills’ requirements. This provision did not appear in the initially introduced legislation from December but was added after an intense lobbying effort. The 90-day delay does not appear necessary and would reduce the amount of revenues available to the state and localities by up to $42 million. Large marketplace facilitators have been collecting sales tax in other states for over a year. In addition, unlike many other states, Virginia has uniform 1 percent local sales tax rates (only three areas have an additional region-specific increment). Given this uniformity, the delay is unnecessary, and large marketplace facilitators should be well positioned to begin collecting sales tax in Virginia by July 1.

This legislation makes a commonsense update to Virginia’s sales tax laws. These reforms are long overdue and represent a needed win for tax fairness. The new ongoing revenues are included in the recently passed state budget and will be available in future years for investments in K-12 schools, higher education, transportation, and other services.

Yet by allowing a select group of companies to potentially get a delay in complying with the law’s requirements, should the delay embedded in the legislation be allowed despite not being included in the budget language, Virginia’s lawmakers would be giving big tech companies an unneeded break.

Budget & Revenue

Chris Wodicka

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