Earlier in June 2018, the Supreme Court finally came to a decision on whether or not online retailers should be required to collect sales taxes in states where they do not have a physical presence. In a landmark 5-4 ruling on the South Dakota v. Wayfair Inc. case, SCOTUS ruled in favor of the state - reversing a 1992 ruling that exempted remote sellers from state sales tax. As a result, South Dakota is now able to require all merchants making more than $100,00 in annual sales or more than 200 transactions in the state to collection 4.5% sales tax. While many brick-and-mortar retailers are counting this as a major win, the impact of this ruling may be less significant than many hope.
Online retailers have not been required to charge sales tax, thanks to Quill Corporation v. North Dakota: a 1992 Supreme Court decision which ruled that the Constitution “bars states from requiring businesses to collect sales tax unless they have a substantial connection to the state.”
Of course, the retail landscape of 2018 looks very different than it did in 1992. In fact, this decision was made two years before the first recorded internet sale was made in 1994 - and was instead focused on mail-order retailers. As ecommerce began to emerge as a viable selling option in the mid-90s, this ruling gave the burgeoning market a needed leg up.
With the growth of online retail, the Quill decision not only caused states to lose billions of dollars in annual tax revenues - it also put local businesses at a major disadvantage, especially those in rural areas. By eliminating sales tax, online retailers were able to offer consumers lower prices than their brick-and-mortar counterparts. Some studies have estimated that the sales tax exemption has afforded major ecommerce players a price differential advantage of nearly 11% over traditional retailers.
In some ways, this has helped contribute to the meteoric rise of online retail. Last year, ecommerce sales hit $454 billion — surging to nearly 9% of total US retail sales. Amazon alone generated $119 billion in revenue from product sales in 2017. And with online sales growing at four times the rate of brick-and-mortar retail, this number was expected to grow even larger in the coming years.
As the market has shifted, online retailers should no longer qualify for “an arbitrary advantage over their competitors who collect state sales taxes,” wrote Justice Anthony Kennedy in his majority opinion. “The internet’s prevalence and power have changed the dynamics of the national economy.”
In today’s increasingly polarizing political climate, it’s interesting to note that South Dakota’s appeal drew bipartisan support. As experts anticipated the outcome of this case, several states have already passed laws similar to South Dakota’s - hoping to take advantage of this decision as well. Across the country, brick-and-mortar retailers are championing this ruling as a win for the little guy. More than that, they see it as an opportunity to level the playing field between them and their ecommerce competition as it could ultimately mean higher price tags for online purchases.
“Retailers have been waiting for this day for more than two decades,” National Retail Federation president and CEO Matthew Shay said 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.”
But the impact of this case might not be as meaningful as some retailers hope. Thanks to their sheer size and scope, companies like Wayfair, Overstock and Amazon may not weather any serious impact on their bottom lines as a result of this change. Especially considering Wayfair and Amazon already do collect taxes on at least a portion of their overall sales (Wayfair collects it on approximately 80% of its US orders, while Amazon collects it for its primary sales in 45 states).
The final decision also left certain factors open and undefined, which could cause legal challenges in the future. Justice Kennedy acknowledged the possibility that some transactions were so small that no taxes should be collected. Additionally, this particular ruling did not consider whether or not states can retroactively seek sales taxes from online retailers.
At the same time, this decision may have a more significant effect on small and medium-sized online start-ups. “Today, the U.S. Supreme Court has reshaped the interstate commerce landscape in a move that could impact small business innovation on the internet, which has been a driving force behind our nation’s economy for the last 15 years,” said Jonathan E. Johnson III, a member of Overstock.com’s board.
As the traditional mattress retail industry has faced growing competition from many smaller online-only brands, this could have a more meaningful impact on the bedding marketplace. But more than promoting immediate change, this decision mainly serves as a meaningful acknowledgement from the Supreme Court that the retail landscape has changed significantly over the past 25 years. Any changes to shopping behavior will ultimately be the result of how both online and brick-and-mortar retailers respond to this ruling.
“Any way you slice it, do not expect consumer behavior to change overnight,” writes Corey Tollefson, senior vice president and general manager for retail at Info, in Entrepreneur. “The modern consumer is addicted to online shopping. Adding sales tax to the price will not impact that immediately, but retailers of all kinds will need to invest in diversifying their sales channels to provide cohesive experiences online, in-store and everywhere in between.”
This article originally appeared in Sleep Retailer eNews on June 28, 2018
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