June 21st was the two-year anniversary of the U.S. Supreme Court’s ruling that allowed states to collect sales taxes on internet purchases in South Dakota v. Wayfair et al. The gist of the decision had to do with the lack of physical presence of a vendor in a purchaser’s home state and the right to collect sales tax from that vendor. As internet sales grew and companies selling exclusively online proliferated, state and local governments experienced steady erosion of one of the key revenue sources that supported government functions.
The decision tasked states with coming up with their own procedures and systems. To meet conditions of the decision, states set a minimum sales level for vendors to be required to collect a tax, anywhere from $100,000 per year and up or 200 separate transactions. Since then, of those states with general sales taxes, only Missouri and Florida have not enacted legislation to tax remote sales. (Three states do not have general sales taxes, Oregon, New Hampshire and Delaware, while two states, Alaska and Montana have a variety of sales taxes at the local level.)
Of the states that have no income tax, Texas and Florida own-source general revenues are first and third most dependent on the sales tax, at 85% and 81% according to census figures for tax revenues in 2019. South Dakota is in second place. Nevada places fourth, no surprise, given its reliance on tourism and hospitality and Washington state is fifth. There is no income tax in either state. These figures are higher than may be reported elsewhere as they only include own-source general government taxes as interpreted by census and no other revenues (such as user charges, typically reported as “business activities” in financial statements). For those inquisitive readers wanting deeper explanation of the census methodology, here is a link.
Texas and Florida present an interesting comparison, both being large population states with Republican governors and generally anti-tax leanings. Texas passed remote sales tax legislation while Florida has not. There are many tax nuances with comparing each of these two states, not least of which are different fiscal years. Admittedly we are taking some liberties with the data here, in exchange for being able to grab the most recent information, as best as possible.
Pre-Wayfair Implementation
On a per capita basis in 2017, before Wayfair, Texas collected $1.66 for every man, woman and child while Florida collected $1.63. These are comparable pre-Wayfair starting points despite the very different character and composition of each state’s sales tax basis. Florida is heavily dependent on tourism and hospitality, both destination travel from out of state and local leisure within the state. When the weather is good (and there are no other mitigating factors like a hurricane or pandemic) the state is able to collect significant revenues to support its budget from out-of-state visitors.
With a high proportion of retirees on fixed incomes in Florida there’s a natural reluctance to raise taxes on the resident population. Purchases related to tourism, hospitality and retiree consumption have historically been made in-state at point-of-purchase. The success of this tax policy over the years is also likely why the state did not feel a pressing need to implement a remote sales tax system.
Post-Wayfair, Pre-COVID-19
In contrast, Texas passed remote sales tax collection at a sales threshold above $500,000, implemented on October 1, 2019. Texas also requires marketplaces such as Amazon, Walmart Marketplace, eBay and Etsy to collect taxes from vendors that sell through their platforms.
To present sales tax collections that reflect post Wayfair but pre-COVID we look at the Texas Comptroller’s February 2020 report, which reflects year-to-date (YTD) collections through January 2020. Texas has a September 1 fiscal year, so this is effectively four months of remote sales tax collections. Sales taxes came in $339 million above their forecast and 4.9% higher than FY 2019 actual collections. Florida’s Office of Economic and Demographic Research YTD report for February 2020 (which also reflects collections through January) shows growth of 3.9%. Florida has a July 1 fiscal year, so there are two extra months of collections in this comparison with Texas.
Post Wayfair, Post COVID-19
Post Wayfair and post COVID-19, is of course, a different story. The stay-in-place orders stopped tourism and hospitality suddenly. In the May report from Florida’s Office of Economic and Demographic Research (reflecting April), sales taxes are down $695 million compared with original budget estimates, or 31.7% below the estimate for May. YTD, FY 2020 is down less – only -2.1%, or $1.27 billion, given the strong economy from July-March.
In Texas, the Comptroller’s report for May (reflecting April collections and seven months of remote sales tax collections) actually shows an uptick of .6% in sales tax collections compared with the same period in FY2019. Despite the difference in fiscal years (giving Florida two month’s extra collections during a strong economy) we can at least say that the two states’ sales tax collections are moving in different directions, Florida down and Texas marginally up.
Florida Tax Watch and others have been pressing the legislature to pass remote tax collection since the Supreme Court decision in 2018. (You can download Florida Tax Watch’ report here.) SB 126 was a remote tax collection bi-partisan bill that went through the Senate but died in February, 2020 in the Senate Appropriations Committee, before the severity of COVID-19 was apparent.
In a letter to the Florida Senate on June 26, Senate President Bill Galvano pointed out how the state’s budget is not in such bad shape going forward and we generally agree with this logic. Florida entered this difficult period with more than $4 billion in reserve, and as we mentioned, the first nine months of FY2020 were grand, producing revenues above estimates. Plus, he mentions, CARES Act monies from the federal government and other federal dollars have been significant for Florida. Further, postponed tax filing dates, while fiscally tough to for the state to live through, will yield additional revenues in the new fiscal year.
Governor DeSantis is still reviewing a budget of $93.2 billion passed by the legislature in March, before COVID-19 stay-in-place orders and in Florida, before the most recent uptick in virus cases. As a result, he needs to make significant budget cuts. Governor DeSantis is reportedly working furiously with his veto pen and promised (jokingly), “the veto equivalent of the Red Wedding from “Game of Thrones” when the main characters were betrayed and slaughtered. We will likely get further news on the outcome of his vetoes this week.
Internet buying is here to stay, in Florida as elsewhere, especially from retirees uncomfortable cruising the many Florida shopping malls. In addition, the new surge in COVID-19 cases along with predictions of a double whammy with flu in the fall may make re-opening a “normal” tourist and hospitality season much slower and smaller than expected.
Texas is certainly not free of other fiscal worries, certainly, and we emphasize that this commentary focusses primarily on sales taxes. Texas has seen a significant drop in natural gas production taxes, franchise taxes and other revenues. However, similar to the Florida Senate president’s letter, once you add an array of federal funds and Coronavirus Relief Funds, the Texas Comptroller’s September-May YTD report shows total revenue growth of 6.6% compared with the same period last year.
At the Local Level
Florida Local Government
Florida local governments are typically reliant on property taxes, but also may levy general sales taxes, fuel taxes and a “local option sales tax”. Rates on this local discretionary tax range from .5% up to 2.5% (including school district levies). Florida Tax Watch prepared a thorough analysis of local government taxes as of January 1, 2019, here.
A recent, May, 2020 roundup of Florida local government fiscal health post-COVID-19 can be found here. In “When the Beaches Close: Impact of COVID-19 on County Fiscal Health in Florida”, authors review each county’s dependence on the three taxes most vulnerable to the stay-in-place order. They analyze fiscal conditions in terms of a basic operating ratio and stress the three taxes by 25% loss and 50% loss (as well as benchmark no COVID-19 effect) and hypothetically consider the impact of these stresses if the shutdown were to continue through 2021.
Summarizing the conclusions, they found that the longer the pandemic continues, assuming a worst case 50% drop in sales and use tax revenues, 15 of the state’s counties would be “fiscally stressed” (operating ratio between .8 and .95) or “very stressed” (operating ratio below .8) and another 33 would be “financially vulnerable” (ratios between .95 and 1.05). Counties that have reserves or “rainy day” funds are buffered if their operating ratios fall below 1.00X. They found, relatively speaking, that counties in the Florida panhandle, which entered this period with thinner margins would likely suffer more stress than those elsewhere in the state.
Texas Local Governments and Sales Taxes
The sales tax situation is quite different in Texas than Florida at the local level. While many local governments around the country traditionally engage in property tax abatements for economic development, some cities and counties in Texas have abated sales and use taxes. For example, the city of San Marcos, Texas has an agreement with a Best Buy e-commerce facility to share sales taxes generated: 75% go back to the company and the city gets 25%. Other cities like Round Rock, where Dell Computer is located, also have agreements.
Cities and counties are permitted to negotiate agreements with companies and use loans, grants, abatements, etc. in order to lure those companies to their communities. (See the city of Rockdale’s description of Chapter 380 here. Counties may use Chapter 381 for a similar purpose.) Many of these agreements were likely written before the Wayfair decision and echo the home advantage of having a large taxpayer, whether sales or property tax, in your community.
The COVID-19 pandemic shelter-in-place has clobbered sales tax collections, not just in Texas, but everywhere. As a result, this has revealed the unfairness to many cities that are losing out on the taxes that are retained elsewhere through special agreements.
State Comptroller Greg Hegar finalized Rule 3.334 that would make sales tax due to the purchaser’s destination, not the seller’s location. The rule is set to go into effect in October 2021. Needless to say, communities that have benefited from the economic development agreements fear significant losses of income. Round Rock estimates a loss of $30 million annually. We suggest that investors take a look at any sales tax backed bonds in communities with special agreements like San Marcos or Round Rock and keep an eye on this issue. More information can be found here, here and here. The Comptroller’s office has copious up-to-date information here.
(We would like to thank our summer intern, Dianjia Wang, a recent Drew University MA in Finance graduate for her help gathering data for this report.)
