Years before the U.S. Supreme Court’s landmark 2018 South Dakota v. WayfairSouth Dakota v. Wayfair was a 2018 U.S. Supreme Court decision eliminating the requirement that a seller have physical presence in the taxing state to be able to collect and remit sales taxes to that state. It expanded states’ abilities to collect sales taxes from e-commerce and other remote transactions. decision, Rhode Island policymakers had the foresight to decide future remote sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. collection authority would be accompanied by a reduction in the state sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate. Now that such authority has been granted by the Court, Rhode Island’s recently-enacted remote sales tax collection law is set to take effect this July. However, a corresponding sales tax rate reduction is not currently scheduled, due to a drafting technicality in Rhode Island’s preexisting law.
Rhode Island’s sales tax rate reduction trigger, adopted in 2011, specifies that the state’s sales and use tax rate will drop from 7 to 6.5 percent “upon passage of any federal law that authorizes states to require remote sellers to collect and remit sales and use taxes.” This law was amended in 2013 to add a line specifying that the rate cut “shall take effect on the date that the state requires remote sellers to collect and remit” sales and use taxes.
Around the time this trigger was drafted, the Marketplace Fairness Act had gained traction in Congress, even passing the U.S. Senate in May 2013. As a result, many policymakers assumed any remote sales tax collection authority would come through Congress. When that bill lost momentum and was not ultimately enacted, years passed before the issue was taken up again—this time by the U.S. Supreme Court.
Since state authorization for sales tax collection was ultimately granted not by passage of a new federal law but by the U.S. Supreme Court’s overturning of prior legal precedent, the Rhode Island Department of Revenue has signaled existing law is insufficient to trigger the sales tax cut (paywall). As written, Rhode Island’s 2013 amendment is indeed ambiguous. Some could reasonably interpret the law to read that any change resulting in newfound collection authority would trigger a sales tax rate cut on the same day the remote collection law takes effect. However, the state’s interpretation is also plausible–that a change in law, not just a change in authority–is needed to trigger the rate reduction.
Regardless of legal interpretation, we do know Rhode Island lawmakers twice enacted legislation to prevent the state from simply accepting the influx in sales tax collections. Now that remote sales tax collection is scheduled to begin, lawmakers today face a choice: will they honor the spirit of the law and adjust existing statutory language to return the collections influx to taxpayers? Or will they simply transfer the influx to state coffers as if no sales tax relief had ever been planned?
While it’s worth noting the planned sales tax relief would result in a greater tax cut than the state anticipates bringing in in new collections starting July 1st, it’s also important to point out that since Rhode Island’s sales tax trigger was adopted, several large out-of-state retailers have already been collecting the state’s sales tax voluntarily. As such, it would make sense for the already-existing collections influx to be taken into account should a sales tax cut be considered.
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