Virginia’s Stake in Online Sales Tax Collection

While Virginians await the final outcome of congressional haggling over legislation that would allow states to require online and catalog merchants to collect sales taxes from their customers, it’s worth remembering that a substantial portion of the revenue for  the state’s new transportation funding package relies on passage of that legislation.

If implemented in the way Virginia lawmakers intended, the transportation funding package would result in more than $6 billion in new funds for transportation over five years. But $978 million of that amount would be generated only if Congress passes its online sales tax collection (or remote seller) bill.

To help cushion the potential blow if Congress doesn’t act, Virginia’s new transportation law would increase the sales tax on the wholesale price of gasoline to 5.1 percent from 3.5 percent in 2015. While this would bring in about $783 million over five years, it would not fully replace the $978 million the remote sales tax was estimated to raise from 2014-2018.

Transportation funding would take another $220 million hit if Congress does not enact remote seller legislation by 2015. That’s because the amount of sales tax revenue that the state is allowed to divert from the general fund – which funds schools, public safety and other services – to the transportation fund would be capped at the 2015 amount instead of rising as planned.

All told, a failed bet on federal remote seller legislation could reduce the state’s planned transportation investment by over $400 million by 2018.

But there’s another thing to keep an eye on as this debate unfolds: Even if federal legislation is enacted, given the strong opposition to any tax increase by many members of Congress, there is a risk that it would include some offsetting limit on states’ ability to raise other kinds of revenues. For example, the legislation could be amended to include a change in other aspects of state taxes that would lead to revenue losses in Virginia.

While lawmakers passed a transportation funding package, whether we’ll get enough revenue remains a roll of the dice.

–Sara Okos, Policy Director