Internet retailers may no longer be able to sell to customers nationwide without collecting sales tax, as the Supreme Court ruled in favor of allowing states to collect taxes on all sales made through online channels.
By a narrow 5-4 margin, the nation’s highest court voted to overturn a 1992 decision that required internet retailers to pay sales tax only in states where they had a physical presence. In the nascent phase of e-commerce, companies like Amazon and Overstock would avoid state sales taxes by locating their warehouses and distribution centers in states that do not charge sales tax, and shipping to consumers nationwide.
Traditional brick and mortar retailers have long argued that this policy gave an unfair price advantage to online retailers, and this morning’s ruling serves as a rare bit of good news for a sector that has been struggling over the past few years. Under this new policy, internet retailers can no longer exploit this tax loophole to appear cheaper than their brick and mortar competitors.
Why Internet sales tax won’t save the traditional retail store
Still, it is unlikely that implementation of an internet sales tax will be enough to stop the struggling brick-and-mortar space in the economy. Most major online retailers have been increasing their physical presence beyond the states that charge little to no state sales tax. The focus in e-commerce has shifted to speed of delivery in recent years, and as competition heats up, online retailers have had to locate their warehouses and distribution centers closer to population centers. Major online retailers such as Wayfair and Amazon have been building up distribution networks for years now, and in doing so have paid sales tax on the majority of their sales already. The Government Accountability Office estimates that states were already collecting approximately 75% of the potential sales tax revenue already, suggesting this may not have been as large of an issue as it is often portrayed.
In fact, Amazon has long been a proponent of proposals to require online retailers to charge state sales tax, supporting bills such as the Marketplace Fairness Act as far back as 2013. As its physical presence increased, the company found itself subject to more state sales tax laws and last year the company began charging state sales taxes on all Amazon purchases, though sales tax on sales from third-party vendors using the Amazon marketplace are levied only if the vendor chooses to do so. As a result, Amazon actually stands to benefit from changing sales tax law, because more purchases will be steered toward Amazon-owned products instead of third party vendors who charge no tax.
These trends of charging sales tax have done little to curb the rapid growth of e-commerce in the economy, which consistently grows around 15% every year. Consumers flock to online sales channels for a number of reasons, but the convenience of online shopping remains the primary driver that is sending customers away from traditional retailers. As such, a change in sales tax policy is unlikely to reverse the long-running trend away from physical stores.
Omnichannel retailers get a boost
That is not to say that this ruling will have no effect in the retail environment. While brick and mortar stores will likely continue to face challenges, imposing a sales tax on all internet sales will help omnichannel entities that have physical presence in every state but are engaged in competition online. Consider a company like Best Buy, which has significant physical presence across the nation. Under the old guidelines, a purchase on BestBuy.com would be subject to sales tax because of the physical presence, while a comparable purchase through a small online retailer may not be. This morning’s ruling levels the online playing field between the two entities.
This is an important development because while price may not be the reason why customers flock to e-commerce, once a consumer decides to shop online, price comparisons become an important factor between retailers. As such, major omnichannel companies such as Target and Walmart stand to see a boost in their own e-commerce sales as the sales tax advantage is removed from their smaller competitors.
Small businesses face challenges
In the end, it’s these smaller internet retailers that stand to lose the most from the Supreme Court ruling. Many small and developing businesses would setup shop in a sales tax-free state, then leverage things like the Amazon marketplace as a way to reach a national customer base. The tax advantage that they enjoyed under previous guidelines would help offset some of the disadvantages that they faced against more developed competitors. With this kind of advantage likely gone for good, these smaller businesses will find themselves in an uphill battle against larger competitors that can offer more robust e-commerce solutions.
Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.