Supreme Court Decision Could Relieve Stress for Some States - Context

The big question: How much do states rely on sales taxes to finance their activities? That’s what it all boils down to when assessing the impact of the US Supreme Court’s June 21 decision in South Dakota v. Wayfair, Inc.. Last month, the court struck down its 1992 physical presence standard, instead holding that states have the right to levy sales taxes on online transactions with retailers that have no physical presence in the state.

The decision paves the way for state and local governments to collect additional sales taxes. States that don’t already have laws taxing internet sales are likely to consider them now. The four states that don’t collect sales taxes at all won’t benefit from the ruling. States that derive a large portion of their operating revenue from sales taxes—Texas and Florida, for example—stand to benefit the most.

While these developments aren’t likely to lead directly to any ratings upgrades or outlook revisions, it is positive for all states with a sales tax. The additional revenues could help bridge gaps in any future budget negotiations. And such incremental revenues may relieve stress for states that have been under considerable and chronic budget pressure, such as Illinois.

Importantly, only active muni investors can take advantage of the diverse effects created by this decision.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.