To measure the revenue impact from online sales following the U.S. Supreme Court's 2018 South Dakota v. Wayfair, Inc. decision, which held that states may collect sales taxes from out-of-state sellers, S&P Global Ratings surveyed six cities across several states that are gaining support from online sales activity. We found that each city recognized an all-time high in remote sales tax collections in 2020. Notably, while many cities across the U.S. benefitted significantly from the decision, many do not track specific online sales tax collections. The surveyed cities discussed in this report are indicated in chart 1.

Chart 1

Online Sales Tax Growth During the Pandemic Provides Stability

The data received from these cities reflects a continued positive trend of online sales tax collections dating back to the court decision in 2018. Four of the surveyed cities (Aurora, Birmingham, Oklahoma City, San Diego) provided three years of remote collections, and of those, each recognized an all-time high in remote sales tax collections in 2020. Moreover, those four cities realized higher collections year-over-year in nearly every month during 2020. The shift toward e-commerce, mixed with the pandemic, created a positive but unsurprising trend, as shown in chart 2.

Chart 2

Aurora, a 160-square-mile area spanning the eastern area of the Denver metropolitan region and the third-largest city in the state by population, has seen 147% aggregate growth in online sales taxes since 2018 (Dec. 31 year-end). The majority of the growth occurred in 2020, as Colorado officially required out-of-state retailers to begin collecting sales taxes based on the location of the buyer starting the year prior. Similar state regulations contributed to the growth across cities nationwide, and all the other cities that provided three years of remote collections showed a similar significant historical growth trend. Birmingham and San Diego realized 480% and 57% total growth in online sales taxes since 2018, respectively, while Oklahoma City's aggregate growth was over 2000%.

Chart 3

Variance In Collections Among The Cities

The reliance on online sales taxes varied across our surveyed cities, ranging from about 0.6% to 18.5% of total sales and use tax collections. The disparity between total collections is largely driven by revenue distribution processes, the difference in sales tax rates, and variability in tax exemptions across states. In general, we consider sales and use taxes a more volatile revenue stream than property taxes, so the implications of a larger reliance on sales taxes can create greater operational risks. However, given that online sales taxes have largely benefitted issuers and even helped to offset local collection declines in 2020, the receipt of the taxes is a net positive despite any potential concerns regarding volatility.

The impact of remote sales tax collections varies by municipality, as certain localities are much more reliant on sales and use taxes to support general operations. Sales and use taxes as a percentage of general fund revenue in cities rated by S&P Global Ratings in Colorado and Oklahoma are generally over 50%. Municipalities in Texas and California rely slightly less on sales taxes in the general fund, and the average in those states is less than 30%. The sales tax portion in the general fund for municipalities in Arizona and Alabama average roughly 45% and 50%, respectively, for entities we rate.

For more information on the differences between each cities' collections processes, please see table 3 in the appendix.

Chart 4

Pandemic-Induced Online Sales Taxes Helped Offset Weaker Collections Elsewhere

The pandemic had an impact on online collection trends for many cities in 2020. Austin, Birmingham, and Oklahoma City all experienced significant spikes in collections in February, followed by a dropoff in March as stay-at-home directives began to take effect. In Birmingham, while total sales tax collections fell during the height of the pandemic, online sales tax collections grew over 50% for each of the respective months when compared to 2019. Similarly, Aurora recognized declines in its local sales tax collections in May and August when compared to 2019, while its online tax collections grew by 61% and 41% in those months, respectively. Chart 5 reflects a monthly remote sales tax trend for Austin, Birmingham, Phoenix, and San Diego. While these cities ended 2020 in a more normalized trend of online sales tax collections month-to-month, it seems that each one experienced a wide variety of spikes and drops as the year went along. The chart does not include Aurora and Oklahoma City, as the remote sales tax fluctuations in 2020 were even more significant than the remaining cities.

For more information on estimated collections during 2020, please see table 2 in the Appendix.

Chart 5

Potential Rating Impacts Moving Forward

State and local governments' ability to collect online sales taxes during 2020 served as an important buffer during a period where brick-and-mortar sales were affected due to social distancing requirements. This benefited local governments in varying ways, depending on their sales and use tax reliance and played a role in providing rating stability for some issuers. Post-pandemic, e-commerce sales may remain strong but likely will not make up a majority of total sales tax collections in the near term. Regardless, we anticipate they will continue to aid total collections across the country, which could result in total revenues that surpass pre-pandemic levels at a faster pace than if online sales were not incorporated into governments' tax bases.

Aside from changes in consumer behavior, the rate of online sales tax collections in the next several years can also grow through efficiency in reporting for all sellers. The majority of online sales taxes still come from major online retailers, such as Amazon, Walmart, and eBay. Many smaller local retailers may not be required to collect any online sales above a certain threshold of gross sales. As state or local governments enhance online sale tax reporting platforms and smaller retailers grow their reliance on online sales, additional remote sales taxes should continue to climb, contributing meaningfully to total collections.

Appendix

Table 1

Table 2

Chart 6

Chart 7

Chart 8

The South Dakota v. Wayfair decision

The U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc. in 2018 paved the way for state and local governments to modernize their tax codes to collect sales taxes from out-of-state retailers. Following the decision, many states and localities began setting implementation dates for collection, beginning in 2018 and continuing through today. Most notably, a majority of state and local governments began requiring collection before the onset of COVID-19 and social distancing requirements, potentially alleviating the actual impact shelter-in-place requirements had on tax collections had the pandemic unfolded prior to the South Dakota v. Wayfair decision. Overall, S&P Global Ratings recognized that the ability for these local governments to receive collections from out-of-state retailers enhanced credit stability across the country. The decision's timing, specifically taking place prior to the pandemic, led to many local governments recognizing smaller declines had they not been able to enforce remote sales tax collection.

The shift to e-commerce and its impact on sales and use tax collections

The share of consumer purchases made online has grown over the past two decades. This shift resulted in state and local governments' sales and use tax revenues eroding over time as they were unable to enforce tax collections on these purchases. This was driven by the physical presence precedent, which required that online retailers must have a physical presence in a state, such as a warehouse or distribution center, in order for governments to require sales and use tax collection. While states could require tax collection by retailers with a physical presence, they were still prevented from taxing a large portion of e-commerce sales where retailers did not meet the standard.

However, South Dakota enacted an economic nexus law in 2017, which essentially deemed remote sellers to have an economic presence in the state if they met certain sales thresholds and paved the way for South Dakota v. Wayfair, Inc. The case overturned the physical presence requirement, and other states followed suit by enacting similar laws to capture these purchases in their sales and use tax bases. Shortly after the onset of economic nexus laws, state and local governments began to require marketplace facilitators to collect sales and use taxes on behalf of third-party sellers. This served as another tax base expansion whereby governments were able to incorporate a greater proportion of online sales without the tax collection becoming overly burdensome on smaller sellers. These significant tax base changes modernized state and local governments' tax codes to better capture consumer spending--the ultimate driver for sales and use tax revenues.

Chart 9

E-commerce's share of total retail sales grew sharply in 2020, particularly in the second quarter, when social distancing requirements unfolded across the country in response to the COVID-19 pandemic. As a result of the South Dakota v. Wayfair decision, many local governments that levy a sales tax had a counterbalance to help offset the decline in brick-and-mortar collections. Following this spike, e-commerce sales moderated to a level closer to where they had been prior to the pandemic and have subsequently remained steady.

Table 3