Traditional Retailers Cheer Recent Supreme Court Ruling

Brick and mortar stores, which have increasingly lost business to e-commerce, were given good news from the Supreme Court last month. On June 21st, justices voted 5-4 to overturn a 1992 decision (Quill Corp. v. North Dakota) that enabled online retailers to refrain from collecting sales tax in states where they didn’t have a physical presence.

Interestingly the prior decision had nothing to do with e-commerce. Quill Corporation, an office supply retailer now owned by Staples, was solely a mail-order catalog company at the time. And back in 1992 (before Amazon began), the court ruled that they didn’t have to collect sales tax from residents in North Dakota, where they didn’t have a location. This set a precedent that helped spur the growth of e-commerce. Here’s how the court’s recent ruling in South Dakota v. Wayfair Inc. will likely play out.

Winners

Obviously traditional retailers will welcome a leveling of the playing field, and hope it sways a percentage of shoppers to shop less online. It’s worth noting that the passage of last month’s act only applies to sellers that annually deliver more than $100,000 of goods or services into South Dakota, or engage in 200 or more separate transactions for the delivery of goods or services into the state.

South Dakota, along with other states that enact a similar law stand to benefit. In writing for the majority in the South Dakota v. Wayfair Inc. decision, Justice Anthony Kennedy wrote that the Quill decision has caused states to lose annual tax revenues of up to $33 billion. This is money states could use for schools and services.

Losers

The Supreme Court decision is going to hurt small and mid-size businesses the most. Many will be third-party sellers that sell through websites such as Amazon, eBay, and Etsy. Several have responded to the outcome of the case by saying it will hamper growth and hiring. Tax analysts believe complying with the decision will put many of them out of business. A majority of the largest e-commerce sellers already collect sales taxes in most states due to having local warehouses or showrooms, or on account of current state laws. Large e-commerce sites, however, do not collect sales tax for third-party sellers in most states. It’s estimated that half of Amazon’s sales come from third-party Marketplace sellers.

Implementation

The court’s ruling in South Dakota v. Wayfair Inc. did not put forth a federal standard for collecting sales tax. This could make compliance for entrepreneurs a potentially complicated and painful experience. As Chief Justice John Roberts expressed in his dissent, “Over 10,000 jurisdictions levy sales taxes, each with different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and different standards for determining whether an out-of-state seller has a substantial presence in the jurisdiction.” Only time will tell how many other states will enact laws that emulate South Dakota’s or what type of legislation other states will pass.
Impact

This decision, as mentioned, will affect small and mid-sized businesses. But e-commerce—favored by many consumers for lower prices, convenience, and greater selection—will continue to grow. By 2022, Forrester estimates that as much as 17% of all retail sales in the United States will occur online.

 

 

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