What Supreme Court’s Internet Sales Tax Ruling Says About The State of Retail
Brick-and-mortar retailers that have seen their businesses upended, and some literally destroyed, by the rise of ecommerce finally had a vindication moment on Thursday: The U.S. Supreme Court, in a landmark 5-4 ruling, basically gives states the green light to have online retailers collect sales tax just like any local retailer.
The message of that decision for the ecommerce players? They’ve grown so big that they can’t have any special break anymore, at least when it comes to collecting sales tax, regardless of whether they have any physical presence in a state.
The highest U.S. court made the decision after South Dakota in 2016 filed a lawsuit against major pure-play online retailers Wayfair, Overstock.com and Newegg regarding state tax collection. Thursday’s ruling in effect overturned a prior court decision in 1992 that has since given a sales tax advantage to online retailers.
In the majority opinion written by Justice Anthony Kennedy, the Supreme Court said times have changed to such a degree that online retailers no longer qualify for “an arbitrary advantage over their competitors who collect state sales taxes” by claiming they don’t have a physical presence in a state.
“The internet’s prevalence and power have changed the dynamics of the national economy,” Justice Kennedy wrote. He added internet players’ not collecting sales tax have cost states as much as $33 billion in sales tax revenue each year.
Among some of the other specific evidence presented by the court? Less than 2% of Americans had internet access in 1992, compared to about 89% today. Last year, ecommerce sales alone totaled $454 billion. When combined with traditional catalogue and other “remote” sales, that figure topped half a trillion dollars. What’s more, since the Department of Commerce first began tracking online sales, ecommerce has surged tenfold to nearly 9% of total U.S. retail sales from just 0.8% –a percentage that will likely head higher with online sales growing at four time the rate of brick-and-mortar retail.
Leveling The Playing Field?
“Retailers have been waiting for this day for more than two decades,” said National Retail Federation President and CEO Matthew Shay in a statement Thursday. “The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well. 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.”
NRF, representing both small retailers and big box merchants from Walmart and Target to Best Buy and Macy’s, isn’t the only one that’s happy about the ruling. In another sign of the disruptive impact of Amazon and such digital native startups including eyeglasses label Warby Parker and mattress brand Casper, more than 20 other trade groups — from National Grocers Association and National Association of College Stores to American Supply Association and Auto Care Association, in March all joined NRF in a brief supporting the South Dakota case on internet sales tax collection.
As to Amazon, which has been fast building its own last-mile delivery network and expanding in physical retail with the acquisition of Whole Foods and openings of Amazon Go and Amazon Books, the ruling likely won’t have any impact because Amazon already collects sales tax on its own first-party sales in all 45 states that have state-imposed sales tax.
However, there’s a wild card as more than half of the units sold on Amazon worldwide last year came from third-party sellers, including many small and medium sized merchants. David Fildes, head of Amazon’s investor relations, said in its most recent earnings call in April that Amazon collects taxes on behalf of third-party sellers in Washington and Pennsylvania (per those states’ rules). “We’re not opposed to collecting sales tax” within a system that’s both “simple and applied evenhandedly,” he said.
Amazon didn’t respond to a request seeking comment following the court ruling.
Internet Players Calling On Congress To Step In
Wayfair, which saw its stock closed lower 1.6% Thursday, said that it already “collects and remits” sales tax on about 80% of its U.S. orders, adding that percentage continues to grow because of its increased “logistics footprint.”
“We welcome the additional clarity provided by the Court’s decision,” the online home-furnishings retailer, with 2017 sales of $4.7 billion, said in a statement. “We don’t expect (the) decision to have any noticeable impact on our business…. Wayfair has long supported a legislative solution that would establish a level-playing field for brick-and-mortar and online retailers by permitting states to collect sales tax on online sales.”
Overstock, whose shares fell more than 7% Thursday, said it’s “prepared to comply with” the Supreme Court ruling, adding the decision will “have no appreciable impact” on its business, but “calls on Congress to intervene and legislate a fair solution.” It had sales of $1.7 billion last year.
Etsy and eBay both also asked the Congress to intervene and set up some sort of tax rules while protecting the many small merchants that sell on their platforms.
“One vitalizing effect of the Internet has been connecting small, even ‘micro’ businesses to potential buyers” across the U.S., Etsy CEO Josh Silverman said in a blog post on the crafts marketplace’s website. “People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country—but probably not if they have to figure out the tax due on every sale.”
To be sure, the South Dakota case on tax collection only applies to online retailers with more than $100,000 in annual sales or 200 transactions from the state. It remains to be seen how that threshold may play out with other states and whether most states would place the tax collection burden on third-party marketplace operators like Amazon, Ebay or Etsy.
However, there’s one thing that’s clear: with their growing clout, ecommerce players, especially the bigger ones, can no longer bet on having that tax edge that some studies estimate have given them a price differential advantage of up to 11% over traditional retailers.
As to the traditional retailers, in a level playing field, they will have to own up to any failure they may still have for not giving consumers a good enough reason to visit and buy.