The Supreme Court served up a rare victory for the bricks-and-mortar crowd Thursday.
The high court reversed itself and signed off on a South Dakota law that forces e-commerce companies to collect sales tax.
But it’s not clear that a more level playing field in terms of state tax collection is going to significantly alter the game between e-commerce and stores.
Amazon, the dominant e-commerce player, has been collecting state taxes for goods it sells since 2011 and rapidly gaining share while also shifting into a hybrid brick-and-click approach. Third-party sellers using the Amazon platform will be impacted and will have to start collecting state taxes, but it is unlikely that many states would try to impose taxes so high that they would choke off e-commerce.
“Now that the proverbial dam has broken, I suspect different states will have the latitude and license to pursue what they think they can reasonably get away with,” said Foster Finley, a managing director at consultancy AlixPartners. “It’s going to be a low-ish single-digit percentage that gets applied.” The South Dakota law at the center of the Supreme Court case levies a 4.5 percent sales tax on online purchases, although the amounts that get applied for online purchases will vary with state and local laws.
That is likely not enough to get a Millennial to put their cell phone down and go shopping in-store.
Finley said online sales taxes would probably not go “very far to closing the gap between the experience of staying in your home and going online and having to get in your car and go to the store. This has become more a matter of habit and approach than what is our absolutely cheapest price.”
Finley said online merchants would find some way to obscure the tax or cover it themselves and count it as a cost of doing business.
However, that means prices of goods sold online will inch up or the profits of e-commerce companies will inch down.
To a bricks-and-mortar world that’s seeing some signs of improvement, but has still weathered sharp drops in foot traffic and mass store closures, that was enough to declare victory in a long-fought battle.
“Retailers have been waiting for this day for more than two decades,” said Matthew Shay, president and chief executive officer of the National Retail Federation. Thursday’s ruling overturned the 1992 Quill decision from the court that forced e-commerce companies to collect sales tax only in states where they had a physical presence.
“The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well,” Shay said. “This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.”
President Donald Trump also applauded the decision, tweeting: “Big Supreme Court win on Internet sales tax — about time! Big victory for fairness and for our country. Great victory for consumers and retailers.”
It remains to be seen exactly how the decision will ripple across retail and e-commerce.
“Be careful what you wish for,” said consultant Jonathan Low, partner at Predictiv, noting that the ruling might prompt e-commerce companies to embrace their physical side. “Amazon et al have deeper pockets, plus they are experimenting with customer-focused bricks-and-mortar strategies that emphasize convenience and price.
“This [ruling] is good news in the short-term, but the real battle appears to be over execution, delivery and data mining, where it appears the e-com merchants still hold an advantage,” Low said. “This does not change the long-term trend for malls but it may give individual merchants some breathing room to show they can still compete.”
And for that breathing room, retail has the state of South Dakota to thank.
A 2016 law enacted by The Mount Rushmore State required out-of-state online merchants with more than $100,000 in annual sales or more than 200 transactions in a year to collect sales tax. Wayfair, Overstock.com and Newegg challenged that ruling and won on the basis of the Supreme Court’s earlier decision in Quill Corp. vs. North Dakota, which established the “physical presence” standard.
The court has now found that the “physical presence rule of Quill is unsound and incorrect.”
The ruling said the rule has become “further removed from economic reality” and that 41 states, two territories and the District of Columbia asked the court to change the approach. Whereas estimates had states losing up to $3 billion in sales tax revenues annually in when the standard was set in 1992, that has ballooned with estimates ranging from $8 billion to $33 billion. (The court also pointed to estimates suggesting South Dakota, a sparsely populated state, lost between $48 million and $58 million annually because of the rule).
With states ready to step in and start collecting those sales tax dollars, which consumers were supposed to remit to the government directly anyway, there is a growing push to come up with a more uniform approach.
The NRF’s Shay said, “Congress must now follow the court’s lead and pass legislation implementing uniform national rules that provide consistency and clarity for retailers across the country.”
While Amazon is seen as largely plugging on despite the ruling and remaining a sharp competitive threat, smaller e-commerce merchants could be hit harder.
Dimitri Koumbis, cofounder with Mai Vu of digital native brand Bishop Collective, said: “While we believe that some taxation is good for building up communities (i.e. schools, infrastructure, etc.), we do worry that lack of proper planning by governments to make this a fair (and easy) transition for both retailers and consumers could cause a major decline in online shopping, specifically for specialty retailers.
“We see this as a bigger concern for smaller businesses who are trying to build their stake in the retail community, both locally and internationally,” Koumbis said. “If governments are going to impose a mandated online sales tax, we hope that they offer a solution for consumers shopping at brick and mortar locations perhaps offering a lower sales tax rate since the cost of doing business is higher. This would boost foot traffic in stores and hopefully reduce the carbon footprint associated with the shipping and return of goods.”
Others underscored that taxes should not make or break a brand.
“If the government is going to have policies that impact business, they should be fair and equitable. If you’re doing a great business, and doing right by your customers, you shouldn’t have to rely on a sales tax advantage,” said Jill Layfield, cofounder and chief executive officer of direct to consumer luxury footwear brand Tamara Mellon. “When you’re building a business online and doing pop-ups and trunk shows as the best [e-tailers] do, it’s inevitable that you’re going to have to charge sales tax in multiple states. To build a business and acquire customers, it’s unavoidable and inevitable if you want to grow, but it’s potentially confusing to the customer. If you’re over-reliant on a price advantage, you’re building business that’s all about price, like something in the consumables space. I can say that because we’re building a brand. Anyway, we’re charging sales tax to 80 percent of our customers.”
Even so, keeping up with all the changes that flow from the ruling could be difficult, particularly for smaller operators.
“Today’s Supreme Court decision will harm America’s innovators and small businesses,” said Jonathan Hauenschild, Counsel of Record for The American Legislative Exchange Council. “By permitting states to tax businesses outside of their borders, the Supreme Court’s decision will usher in a new, unheralded period in interstate commerce. Small businesses and innovators will be subject to over 12,000 taxing jurisdictions in the United States. They will face audits and compliance costs very few can comprehend. And many businesses will likely limit their reach or go out of business rather than face the risk of audit from states like California, Illinois, or New York. At this point, only Congress can save small businesses and innovators by passing legislation to protect them from over-aggressive state tax collectors.”