Winners, losers in Supreme Court ruling
The Supreme Court handed a victory to the nation’s brick-and-mortar retailers on Thursday, overturning ruling that e-commerce marketers only had to collect sales tax in states where they had some sort of physical presence.
Physical retailers are clearly the big winners in the Supreme Court’s decision. (It’s estimated that not collecting sales tax gives online retailers anywhere from a 5% to 9.98% advantage, depending on the state, over traditional retailers in product pricing.)
The nation’s leading retail associations are also celebrating. Both the National Retail Federation and the Retail Industry Leaders Association have long argued for a “fair and level” playing field. With this ruling, the Supreme Court has laid the groundwork for just that.
The other big winners are the states, with the prior ruling causing states to lose annual tax revenues of up to $33 billion, Justice Kennedy wrote in the majority opinion.
S&P Global Ratings believes the Wayfair decision will help stem state tax erosion in a changing economic environment, with the additional tax revenue providing a “welcome incremental addition to state coffers.”
“We anticipate local governments that levy sales and use taxes will benefit similarly, broadening a revenue source integral to operations for many municipalities,” S&P said. “The additional tax revenue may also help local retail malls avoid a competitive disadvantage, potentially supporting local government assessed values and downtown commercial cores.”
Tax and accounting firms and tech companies are also likely to profit from the ruling. With more than 10,000 taxing jurisdictions across the United States, online retailers are sure to find compliance — without guidance — difficult at best.
“Companies engaged in e-commerce may have to revise their business models, their IT systems and their internal processes for calculating their tax obligations,” said Deloitte’s national multistate tax leader Valerie Dickerson, partner, Deloitte Tax LLP. “One key question is whether they have the required customer data to determine how to properly source sales.”
Another winner — oddly enough — is Amazon. The online giant already collects a sales tax in every state that has one. But many of its pure-play competitors do not. Already challenged by Amazon’s price competitiveness and Prime appeal, they will be even more hard pressed to compete price wise given the new tax burden.
“The biggest winners are Amazon and large brick-and-mortar players,” Bryan Gildenberg, chief knowledge officer at Kantar Consulting, told Chain Store Age. “The ruling will greatly affect Amazon’s first-party competitors, such as Wayfair and Newegg.”
(Thursday’s decision did not really address how third-party sellers collect sales tax. But Gildenberg believes Amazon’s vast network should not be affected since the Supreme Court “clearly states that the law needs to have a safe harbor for small businesses.”)
But “first-party competitors” are not the only losers. Indeed, small online-only businesses and mom-and-pop e-marketers are likely to be most impacted by the ruling.
“Small businesses and Internet entrepreneurs are not well served at all by this decision,” said Karen Kerrigan, president & CEO of the Small Business & Entrepreneurship Council. “It creates uncertainty, havoc, vast new costs and unknown exposure for small businesses. The fact that small businesses must now act as tax collectors for thousands of separate state and local jurisdiction is outrageous.”
Neil Saunders, managing director of GlobalData Retail, said that the challenge for smaller players will be significant “and the concern here is that complexity could stymie innovation and entrepreneurialism.”
He held out some hope, however, that most states would exempt smaller players.
Wayfair: No major impact from Supreme Court tax decision
Online home furnishings retailer Wayfair isn’t expecting any big impact on its business about losing the case it was a party to.
Responding to the U.S. Supreme Court decision in South Dakota v. Wayfair, the company said it already collects and remits sales tax on about 80% of its U.S. orders, with the number growing as it expands its logistics footprint. Wayfair had net revenue of $5.2 billion in its last fiscal year.
“As a result, we do not expect today’s decision to have any noticeable impact on our business, as it may on other retailers who do not currently collect and remit sales tax,” the retailer stated.
In addition to its namesake brand, Wayfair also operates several other brands, including Joss & Main, AllModern, Birch Lane and Perigold. The company is based in Boston.
Commentary: Compliance with sales tax ruling will be ‘problematic’
From an economic perspective, today’s Supreme Court ruling will come as a relief for states desperate for revenue. It will also be welcomed by those physical and omnichannel retailers which have a national presence and, therefore, already charge and remit sales tax in most states.
The losers from the ruling are online-only retailers, especially smaller players, and consumers who will end up paying more for products. By our calculation, the additional costs for consumers could be up to $15.2 billion a year.
The concern for retailers like Wayfair is that their prices will now effectively rise across many states. This weakens one of their competitive advantages over both physical players and those larger online and omnichannel retailers which have more of a national presence. However, in our view, this outcome is fair. It means that retailers will now compete on a level playing field.
A more problematic issue is one of compliance. Because of county and city taxes, there are well over 10,000 tax jurisdictions across the United States. Within each, there are various exemptions and rates for different products. This results in an extremely complex and intricate web of rules, that will require a lot of processing by retailers in order to calculate the taxes owed to each state and locality.
While larger retailers will be able to cope with this, it will still impose an initial burden on them which may further increase costs that could be passed on to consumers. That said, this is nothing that physical retailers operating across multiple locations don’t already have to deal with.
The challenge for smaller players will be significant and the concern here is that complexity could stymie innovation and entrepreneurialism. However, in our view, most states will likely exempt smaller players and, even if they don’t, their small scale will probably allow them to escape scrutiny.
As unfortunate as these problems and consumer losses are, in our view the Supreme Court’s ruling and negation of previous judgments which prevented the taxation of some online transactions by states, is correct and valid. The Court cannot and should not concern itself with practicality. It must only concern itself with the law and the Constitution.
In that regard, the judgment is reasonable. Provided states do not engage in discriminatory taxation, they have a sovereign right to sales taxes on business conducted within their jurisdiction. The courts and the federal government can only step in when taxation is levied unfairly and unequally to different actors or businesses and therefore impedes interstate commerce.
All that noted, we do not expect this to be the final ruling by the Court, as retailers and states are likely to raise further challenges on other grounds.