Shoppers use stairs at the Menlo Park Mall in Edison, New Jersey. (Photographer: Michael Nagle/Bloomberg)

Retailers Have One Fewer Excuse After Supreme Court Tax Win

(Bloomberg) -- Chalk up another victory for brick-and-mortar retailers.

Stores with physical locations like Walmart Inc. and Target Corp. are on a winning streak after the U.S. Supreme Court ruled that states can require the collection of sales tax on internet purchases, overturning a 1992 decision that traditional retailers said put them at a disadvantage with online competitors. National retailers with actual stores were already required to collect the taxes, while internet-only competitors and upstarts could sometimes skip them, making their online goods look cheaper.

The news is a welcome change for a retail sector that’s endured a brutal few years with surging bankruptcies, store closings and the liquidation of big-name chains like Sports Authority Inc. and Toys “R” Us Inc. It also follows last year’s string of successes, when retailers helped to kill a levy on imported goods and saw their federal taxes slashed with a national overhaul.

Retailers Have One Fewer Excuse After Supreme Court Tax Win

Now, the retail survivors have one fewer excuse to blame for their woes.

“They have, in some ways, been hiding behind excuses like a tax differential,” said Edward Yruma, an analyst for KeyBanc Capital Markets. Their complaints have resonated less in recent years as shoppers’ migration online has been more rooted in convenience than price, he said.

“What’s driving the success of online players is this is how the consumer wants to shop today,” Yruma said. “It’s that simple.”

Shares of Wayfair Inc. initially plunged as much as 9.5 percent to $105.11 after the ruling was announced, before paring most of the loss after the company said it doesn’t expect “any noticeable impact.” Inc. dropped as much as 1.9 percent to $1,717.56, while Walmart -- which only gets about 3 percent of its U.S. revenue online -- reversed earlier declines to gain as much as 1.1 percent to $84.55. Best Buy Co. Inc. advanced as much as 2.5 percent.

The decision “finally brings sales tax collection into the internet age,” Best Buy said in a statement, “and reinforces the basic American notions of fairness and a level playing field for all who choose to compete in the marketplace.”

Industry representatives immediately hailed the decision. Matthew Shay, head of the National Retail Federation, said the Supreme Court ruling “clears the way for a fair and level playing field where all retailers compete under the same sales-tax rules.” Deborah White, general counsel for the Retail Industry Leaders Association, said her group “couldn’t be more pleased with the outcome.”

What’s Ahead

The long-term impact of the Supreme Court’s decision remains to be seen. States were already collecting about 75 percent of the potential taxes from online purchases, according to the Government Accountability Office. The portion not being taxed could total as much as $13 billion a year, the GAO said.

“No one thinks that sales tax is the only thing that drives sales to one retailer over another, but it certainly is a thing,” said Eric Citron, partner with Goldstein & Russell. “The magnitude of the price differential should really be enough to make a real difference to consumer decision making.”

Many large online sellers were already collecting sales tax in states where they have a physical presence -- a legal qualifier under the 1992 ruling in Quill Corp. v. North Dakota. Furniture-seller Wayfair, for example, collects the levy on about 80 percent of its sales -- a reflection of its expansion as it opens more warehouses distribution centers across the country.

Amazon says it does collect state taxes on its online sales. But levies on sales from its online marketplace, where third parties offer goods, are collected at the seller’s discretion. These sales account for about half of online giant’s retail revenue. A handful of states already have laws requiring marketplace participants to collect state levies.

If the new state sales tax requirement does end up hurting some of the marketplace sellers, that may actually help Amazon, according to retail analysts at Loop Capital Markets. The company could benefit by selling more of those items directly, which would boost its revenue because Amazon would receive the full price of the transaction instead of just a commission, the research firm said in a note.

Small Companies

Smaller companies may be the most impacted by the decision, according to some of the big online retailers, who say they may lack the staff to follow the rules across thousands of U.S. tax jurisdictions.

“The burden now is reporting in over 9,000 jurisdictions, and will put many sellers in jeopardy,” said Robert Roque, managing director of Beautyvice, an online seller of health and beauty products based in Florida.

The decision may also create more legal questions, since states may begin passing their own statutes with the goal of raising revenue from online retailers, according to Bruce Ely, a tax attorney at Bradley Arant Boult Cummings LLP. Some may even try to collect levies from previous years, he said. Although that could get tied up in the courts.

The ruling may also finally spur Congress to pass a law setting a federal standard for which companies have to collect the tax. The statute in South Dakota, which the court upheld, requires collection for retailers with more than $100,000 in annual sales.

Bills trying to address this matter have languished in Congress for years. The main issue is that elected officials didn’t want to be seen as administering a new tax on consumers or businesses. But now, they can act in the interest of bringing clarity to the marketplace, Ely said.

“Here’s a perfect time for Congress to save the business community from the big, bad taxing authorities,” Ely said. “They can look like the good guy, rather than the bad guy, which has a certain political appeal to it.”

©2018 Bloomberg L.P.