Supreme Court Decisions to Have Limited Impact on Municipal Credits

The U.S. Supreme Court rendered verdicts in two cases that could have broad implications on the municipal market: South Dakota v. Wayfair, Inc. and Janus v. American Federation of State, County, and Municipal Employees. The Wayfair decision, a ruling in favor of South Dakota, will allow states to assess sales taxes on online retail transactions. The Janus decision, a ruling in favor of plaintiff Mark Janus, prohibits public unions from requiring workers to pay union dues. While both decisions were close, decided by a 5-to-4 vote, the implications are significant for municipal credits, but the ultimate impact may be less than investors expect.

South Dakota v. Wayfair

On June 21 in the case of South Dakota v. Wayfair, Inc., the U.S. Supreme Court ruled in favor of South Dakota. The 5-to-4 decision effectively allows states to pass laws subjecting online retail transactions to sales taxes. This ruling overturns the Court’s 1992 decision in Quill Corporation v. North Dakota, which prohibited states from requiring a business to collect sales tax unless the business had a physical presence in the state. The Wayfair decision should cause an increase in sales tax receipts, which may benefit some state and local general obligation credits, as well as some special tax credits that are secured by sales taxes. However, we do not believe the impact will be of a magnitude that would result in a significant quantity of credit upgrades or material spread compression.

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