Many brick and mortar retailers are noticing a boost this shopping season because of a recent Supreme Court decision closing a tax loophole that had favored online commerce. For many years, the law prohibited states from charging sales taxes to businesses that did not have a physical location in the taxing state. In South Dakota v. Wayfair , the nation’s highest Court changed this rule, and held that online businesses could be forced to pay sales taxes in states where they made sales, regardless of whether or not they have a physical presence there. The Court said that while the rule may have made sense in prior centuries, it gives e-retailers a significant unfair advantage today. When it comes to labor costs and rent, large e-retailers already enjoy a competitive advantage over mom-and-pop stores. The court reasoned that the tax loophole further undercut mom-and-pops on price.
Many new state tax laws that take advantage of the decision just went into effect on November 1st. Pease & Curren analyses the reasons behind the decision, and predicts how it will affect brick-and-mortars, small online vendors, and others this holiday shopping season and beyond.
THE OLD RULE WAS FOUND TO PROMOTE RAMPANT TAX EVASION
Although consumers were required under the old rule to pay the sales taxes themselves on their online purchases, the vast majority never did. Consumers are so used to stores including sales taxes in the price of their goods that most never think to self-report online transactions. In fact, the Court noted that Wayfair, the online furniture seller involved in the case, slyly advertised on its website that online transactions were tax-free. In the opinion of the Court, maintaining the old rule would allow online vendors to profit by continuing to promote tax evasion.
THE DECISION COULD PLACE A HEAVY BURDEN ON SMALL WEB-BASED SELLERS, BUT THERE ARE LIMITS TO HOW FAR STATES CAN GO
Four of the nine judges dissented from the Wayfair decision and pointed out that learning the separate tax laws of all fifty states would be an enormous burden for smaller online sellers. The judges behind the decision downplayed these concerns, predicting that tax software would likely be developed to automatically facilitate compliance for web-stores. (This is an excellent example of how changes in technology drive developments in the law.) Moreover, the smallest online vendors are unlikely to be affected by the decision.
Even after the decision, there are limits on a state’s ability to charge taxes to far-away companies. The U.S. Constitution is set up to promote nationwide commerce and prevent each state from favoring its own companies at the expense of outsiders. The South Dakota law at issue in the Wayfair case has built-in protections for small online vendors: only sellers doing 200 separate transactions or $100,000 in sales within the state need to collect sales taxes. The Court suggested that this protection is sufficient, but hinted that other sales tax laws that unduly burden small vendors could be thrown out as unconstitutional. According to Bloomberg , as of November 1, 2018, twenty-three states impose sales taxes on online transactions, and all of them have followed South Dakota’s lead and protected small online sellers by placing minimum thresholds in dollar amounts or number of transactions before imposing a tax on online vendors .
THE EFFECT OF THE RULING ON THE JEWELRY AND COIN INDUSTRIES
Research has consistently shown that sales of luxury goods, such as jewelry and collectible coins, are especially hampered by tax increases. In a harsh tax environment, consumers will turn away from luxuries but must continue to buy necessary staples, such as food. This is why the physical presence rule, which gave a tax advantage to e-commerce retailers, had an outsized and negative impact on local jewelry stores. Consumers were more likely to look online for the best prices, especially on everyday jewelry and pieces that did not require sizing. With this tax loophole out of the way, jewelry stores are expected to pick up some lost ground this Holiday season. Stores that have a strong local presence and employ a consultative, service-oriented approach to sales are expected to reap the most benefit from the change. Click here to see Pease & Curren’s advice to brick and mortar retailers .
ADVICE TO SMALL COMPANIES DOING BUSINESS ONLINE
One unfortunate possibility is that shops that do a small amount of business online might ditch their own online platforms in favor of selling through larger sites that offer third-party opportunities, such as Amazon.com. Amazon’s sophisticated legal and accounting teams allow it to comply with tax laws in every jurisdiction, and selling through them is an easy way to forestall problems. However, this solution further consolidates profits and power in large tech firms, and lessen the internet’s diversity. To avoid this result, Pease & Curren hopes that future Supreme Court decisions will clarify that states may only impose sales taxes on vendors that exceed a defined threshold of business in the jurisdiction. This was the structure of the state law blessed in the Wayfair case. The best way for retailers to promote this outcome is to continue to support their trade groups, which monitor legal changes, lobby legislatures, and file briefs presenting retailers’ interests in influential cases.
For smaller businesses that choose to retain their own online platforms, software does exist that can lighten the administrative tax burden. PC Magazine has a great article that makes recommendations on effective software .
THE FULL IMPACT OF THE DECISION REMAINS TO BE SEEN
Following the Supreme Court decision, many states imposed new taxes on e-commercein time for the shopping season, and more are likely to jump on the bandwagon as time goes on. Ultimately, it remains to be seen how much lost ground brick-and-mortar retailers will recover against their online competitors, now that the taxman is no longer tilting the playing field. This year’s holiday shopping season will be a great test of consumer preference for the mall or the screen. All the undersigned knows for sure is that in his household, when children send their wish lists to the North Pole, an overwhelmed Santa prefers that they include links .
Before joining Pease & Curren, Frank Curren attended Georgetown Law and was a litigator at a Boston-based non-profit. His mother owns a local jewelry store but he has an Amazon prime membership!