Brick-and-mortar retailers that have seen their businesses upended, and sometimes literally destroyed, by the rise of e-commerce finally had a moment of vindication on Thursday: The U.S. Supreme Court, in a landmark 5-4 ruling, basically gave states the green light to have online retailers collect sales tax, just like any local retailer.
The message of that decision for e-commerce players? They've grown so big that they can't get any special breaks 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
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 that internet players not collecting sales tax have cost states as much as $33 billion in sales tax revenue each year.
Among the specific evidence presented by the court? Less than 2% of Americans had internet access in 1992, compared with about 89% today. Last year, e-commerce sales alone totaled $454 billion. When combined with traditional catalog and other “remote” sales, that figure topped half a trillion dollars. What’s more, since the Department of Commerce first began tracking online sales, e-commerce has surged tenfold, to nearly 9% of total U.S. retail sales, from just 0.8% — a number that will likely become larger with online sales growing at four times the rate of brick-and-mortar retail.
Leveling The Playing Field?
“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 “The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well.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.”
NRF, representing both small retailers and big-box merchants, from
As for Amazon, which has been fast building its own last-mile delivery network and expanding into physical retail with the acquisition of Whole Foods and the openings of Amazon Go and Amazon Books, the ruling likely won't have any impact because Amazon already collects sales tax on its first-party sales in all 45 states that have a state-imposed sales tax.
There's a wild card, however: 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 1.6% lower at Thursday's close, said that it already “collects and remits” sales tax on about 80% of its U.S. orders, adding that the 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 sales of $4.7 billion in 2017, 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 that the decision will “have no appreciable impact” on its business. Still, the company, which had sales of $1.7 billion last year, “calls on Congress to intervene and legislate a fair solution.”
Etsy and
"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 clear, the South Dakota case on tax collection applies only 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, one thing is clear: With their growing clout, e-commerce players, especially the bigger ones, can no longer bet on having a tax edge that some studies estimate has given them a price differential advantage of up to 11% over traditional retailers.
As for traditional retailers, with a level playing field, they will have to own up to any failure they may still experience for not giving consumers a good enough reason to visit and buy.
