By Logan Finney, Idaho Reports
Idaho collects a six-percent sales tax on most retail purchases. That revenue is directed through a complex distribution formula that divvies up the money between various state accounts, distributes a portion to local governments, and deposits the remainder in the state’s general fund.
Sales taxes from certain online purchases, however, do not pass through that formula. Instead, they go directly into a separate tax relief fund where they sit until the legislature decides how to use the money.
I wrote this in 2020 for Idaho Public Radio (lightly edited here for Idaho Reports style):
What is the Tax Relief Fund?
Idaho lawmakers had discussed collecting taxes on internet sales since the mid-2000s, but precedent from the U.S. Supreme Court at the time said that retailers only had to collect sales tax if the business had a physical presence in the state. The Legislature created the tax relief fund in 2014 as a place for sales taxes collected and paid by retailers who weren’t necessarily required to do so.
During that time, Idahoans were supposed to be self-reporting tax-free purchases they made online or out-of-state and paying a “use tax” on those items. However, only 1.36 percent of Idaho taxpayers paid their use tax in 2012, NPR reported. This was also the case in most of the country, as more states sought to make online retailers collect and pay sales taxes directly.
In the 2018 session, Idaho finally passed a law to collect sales taxes from online retailers with an in-state affiliate, satisfying the “physical presence” rule. In June 2018, however, the Supreme Court overturned that requirement in a 5-4 ruling, opening the door for states to collect sales taxes for online purchases directly.
In the majority opinion for South Dakota v. Wayfair, Inc., Justice Anthony Kennedy wrote that the physical presence rule had become “a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state’s consumers—something that has become easier and more prevalent as technology has advanced.”
The Legislature responded to that court decision in 2019, passing a law to collect sales and use tax from online sellers who do more than $100,000 of business in the state per year.
“It will be collected by the seller, instead of our citizens having to report it on their income tax returns on their use tax,” Sen. Jim Rice, R-Caldwell, said when he sponsored the bill. “This is not a new tax — it’s a tax that was always due and a change in the method in which it’s collected.”
The 2019 internet sales tax bill directed that new revenue directly into the tax relief fund — where the ‘in-state affiliate’ money had been going — rather than sending it through the traditional sales tax distribution formula.
The bill was amended to put a five-year limit on that practice, beginning to direct online sales taxes through the regular formula in 2024. However, after distribution the remainder will still be deposited into the tax relief fund, rather than the state general fund.
The tax relief fund is projected to total around $80 million at the end of this year.
What relief has the Tax Relief Fund provided?
In his January 2020 State of the State address and budget recommendation, the governor suggested using $35 million from the fund for grocery tax relief, leaving the details up to lawmakers. House Speaker Scott Bedke, R-Oakley, introduced legislation to use those funds to increase the annual grocery tax credit.
Idaho citizens qualify for $100 grocery credit—$120 for those age 65 or older— when they file a state tax return. Bedke’s proposal would have increased that credit to $135 for all age groups.
“In the past, the mentality was we only had a limited amount of money,” Bedke told the House Revenue and Taxation Committee on January 22. “We bumped the amount for seniors up, knowing that we would come back later to negate the effects of sales tax on food for all citizens.”
That proposal saw some pushback from members like Rep. Priscilla Giddings, R-White Bird, who introduced her own bill which she described as mimicking the grocery tax repeal that passed the Legislature in 2017 but was vetoed by then-Governor C.L. “Butch” Otter.
The tax committee sent House Bill 494—the final draft of Bedke’s tax credit increase—to the full House mid-February. From there, however, the final floor vote was delayed several times.
Majority Leader Mike Moyle, R-Star, asked the House for consent to hold HB 494 on its calendar ten times over the session, until eventually the Senate adjourned sine die (without a return date) on March 19. Without the opportunity for a bill to pass through the other chamber, grocery tax reform in the House effectively ended for the year.
The final week of the session, Assistant Majority Leader Jason Monks, R-Nampa, put forward a bill to utilize the fund for property tax relief. His bill would have paid out the full balance in the fund to homeowners—by his calculations, a check of about $180 per household.
Democratic lawmakers pointed to internet sales taxes several times during the session as a component of their property tax relief slate. They argued that rather than directing online sales tax revenue into a relief fund until the Legislature decides what to do with it, all sales tax revenue should be sent through the distribution formula to cities and counties.
“Brick and mortar sales in this state are diminishing, and they’re moving to online sales,” House Minority Leader Ilana Rubel, D-Boise, said in a February press conference. “The pot of money that’s available to fund local government and to fund state needs is shrinking, while the pot of money that has been cordoned off and has been rendered totally unavailable to local governments is growing.”
No bills utilizing the tax relief fund passed into law this session, leaving it intact until Little’s $39.3 million appropriation by executive order for coronavirus response.
Where are we now?
The steep economic drop off caused by the pandemic response is expected to limit state revenue collected by the end of the fiscal year in June, both in sales taxes and in income taxes. The governor’s second executive order directs state agencies to hold back one percent of non-coronavirus spending for the year, which his office expects to save about $40 million.
“Although the state budget will take a hit from the disruption in our economy in recent weeks, I want to assure Idahoans we have a plan to ensure governmental services will continue,” Little said Friday. “We will meet our constitutional requirement for a balanced state budget without having to raise taxes.”
Remember two years ago when the pandemic first reached the state? When agencies were instituting budget holdbacks in anticipation of COVID-19 devastating the state’s economy?
As we’ve been talking about the state’s historic budget surplus, the tax relief fund has been steadily humming along in the background, too.
As I wrote in the excerpt above, at the end of the 2020 session, the fund was expected to collect around $80 million that year.
In 2021, lawmakers used $180 million for the inaugural batch of rebate checks and another $110 million to lower income tax rates.
Last week, the fund’s balance sat at roughly $131 million, until new income tax policy under House Bill 436 sent $94 million toward a second round of rebate checks totaling $350 million. Next fiscal year, the fund is projected to collect another $204 million, which is already earmarked to offset that ongoing income tax rate cut.
The House passed a bill Thursday to increase the state’s food credit — currently $100, up to $120 and to $140 for seniors — but that boost wouldn’t start until 2023 because lawmakers don’t know if the tax relief fund will have enough money for it yet.
Sen. Jim Rice, R-Caldwell, workshopped a bill over the interim that would stop directing money to the tax relief fund and treat it instead as regular sales tax revenue. It would then add another layer to the sales tax distribution formula to create a new fund aimed at phasing out school supplemental levies.
“I’ve asked multiple legislators why they don’t dissolve that ‘Wayfair Fund,’ the tax relief fund,” Association of Idaho Cities executive director Kelly Packer said. “If they were to do that — especially since it’s the largest component of sales tax revenue growth in the state currently — that would help reduce the reliance of locals on property tax.”
Packer — a former state representative — and AIC legislative chair and vicechair mayors John Evans of Garden City and Bradley Holton of Greenleaf joined Idaho Reports this week to talk about city budgets, the state’s relationship with local governments, and what lawmakers can do to provide relief for property taxes.