States Preparing New Digital Sales Tax, Sports-Betting Laws

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By Ryan Prete

States should feel confident about new tax revenue streams that hinge on impending U.S. Supreme Court decisions on digital sales tax and legalized sports betting.

Max Behlke, director of budget and tax for the National Conference of State Legislatures, told an audience at the Multistate Tax Commission’s spring committee meetings that he believes justices will side with South Dakota in a monumental digital sales tax case argued April 17.

“I do think South Dakota will prevail over Wayfair,” Behlke said April 24 in Bloomington, Minn. “I would bet money on this case, just not very much.”

South Dakota v. Wayfair is a direct challenge to the 1992 decision in Quill Corp. v. North Dakota, which prohibits states from imposing sales tax collection obligations on vendors lacking an in-state physical presence. Practitioners expect a decision by late June.

“Congress has had long enough to act on this issue, and states got tired of Congress not acting,” Behlke said. “If lawmakers don’t like the ruling, they can certainly pass a law to change it.”

Behlke said that if the court chooses to codify Quill, he would expect more states to install both marketplace provider provisions that require Amazon-type sellers to collect sales tax on third-party transactions conducted on their platforms, and Colorado-style notice/reporting regimes that require retailers to alert customers to their sales tax liabilities.

Keeping ‘Hysteria to a Minimum’

Behlke said that states must discuss how to prepare if Quill is overturned.

Greg Matson, MTC executive director, agreed with Behlke and said that there must also be calm and collective conversation to keep “hysteria to a minimum” among states to avoid a chaotic situation among sellers and departments of revenue if Quill is overturned.

Behlke also lambasted arguments that states will install retroactive back tax measures if the court sides with South Dakota.

“I’m not aware of any state that is considering retroactivity,” Behlke said. “And I find it frustrating that states are being punished and criticized for something that they haven’t even committed yet.”

The 26-year-old Quill case has sparked perhaps the largest wave of state and local tax-related activity during the past decade in attempts to “kill Quill”, as the modern marketplace has spilled outside geographic borders and increasingly migrated to e-commerce.

Sellers have to comply with a variety of state tax collection regimes, which have proliferated in number in recent years, including:

  •  economic nexus models that impose sales tax collection duties on retailers that rise above a specified sales threshold;
  •  Colorado-style notice/reporting regimes that require retailers to alert customers to their tax liabilities;
  •  marketplace provider provisions that require Amazon-type sellers to collect sales tax on third-party transactions conducted on their platforms; and
  •  “cookie nexus” regulations, which require online vendors to collect state sales tax if they have property interests in or use in-state apps and “cookies.”

Legalized Sports Betting

Behlke said he is also confident the U.S. Supreme Court will rule in favor of ending a 26-year ban on the statewide legalization of sports betting.

The high court heard oral argument Dec. 4 in Murphy v. NCAA, which seeks to repeal the Professional and Amateur Sports Protection Act of 1992 (PASPA), a federal law which formally prohibits states from “authorizing” gambling related to professional and amateur sports leagues.

“Most of the people I’ve talked to expect the court to overturn PASPA, and states should be preparing themselves for such a ruling,” Behlke said. “The issue of sports betting will be coming to a state near you soon.”

A decision in the case is expected as early as April 25.

Enacted, Proposed Legislation

Murphy v. NCAA was originally New Jersey’s attempt to repeal part of its state ban on sports betting in an effort to revive the struggling Atlantic City region.

Sports betting has been authorized at some level in six states—Connecticut, Mississippi, New Jersey, New York, Pennsylvania, and West Virginia. PASPA grandfathers in Nevada, Delaware, Montana, and Oregon, which all had legalized sports betting laws on the books.

Many others aren’t far behind. Currently, 39 proposals to legalize sports betting are active in 14 states, according to the American Gaming Association.

Some states have attached an “integrity fee” to their proposals. The fee would allow professional sports leagues like the National Basketball Association and the National Football League to grab a piece of each wager.

New York and Kansas have proposed a 0.25 percent integrity fee. Indiana, Kansas, and Missouri have lobbied for a 1 percent integrity fee.

To contact the reporter on this story: Ryan Prete in Bloomington, Minn., at rprete@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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