Last week, the Supreme Court ruled that states can begin to collect sales tax on web purchases. This is a momentous ruling in the world of retail as the decision overturns the 1992 Quill decision that, in effect, provided online sellers with a perceived price advantage over their brick-and-mortar counterparts. According to the Wall Street Journal, “By a 5-4 vote, the court closed a loophole that helped fuel the early growth of internet sales.” The wording of this is apt – that ruling certainly gave online sellers, that did not maintain a nexus (or “physical presence”) in a given state, a perceived advantage over sellers that did have nexus in the state. The word perceived in the previous sentence is important – more on that momentarily – as the same WSJ article incorrectly states the following, “The ruling likely will spell the end of an era in which consumers could avoid taxes by purchasing goods online instead of from local merchants.” Not exactly.
A brief history
We know that the Quill decision made it so that online merchants, with no nexus, did not have to collect and remit sales tax back to the state in which the buyer lived. But, that did not mean the tax wasn’t due – it still most certainly was. What the decision created though was a scenario that put the onus from the seller, onto the buyer (i.e. consumers). At the end of the year, consumers were supposed to take all the purchases they made online that were not collected, calculate the sales tax, tally up the total and remit it to their state at tax time. I think we all know that this was not happening (hence Justice Kennedy citing studies in the ruling that the Quill decision was costing states up to $33.9 billion annually in uncollected sales taxes).
This is where the perceived advantage comes into play. Online merchants appeared to have lower prices than brick-and-mortar sellers because sales tax was not being included in the final price. This was exacerbated as the internet grew, because it was easy to compare prices in “shopping carts” across sellers – those with a physical presence who had to collect sales tax and those without, who didn’t.
What’s next
Today’s retail landscape is multifaceted, with selling happening across different channels. Frankly, we were long overdue to have legislation that properly supports that landscape. A sale is a sale – no matter where it takes place. While this is a great first step, it could create a patchwork quilt of state laws that could become convoluted for smaller sellers to navigate. While technology has advanced significantly since the 1992 ruling, and there will be ample solutions available to sellers to clarify the process, it will still be a situation that is in constant flux and will need close monitoring as individual states change their laws. I believe a federal solution is still the most desirable outcome for the industry as a whole – but this ruling is still certainly a step in the right direction.
Brick-and-mortar impact
Physical retail has been much maligned over the last several years. I think this decision, while not immediately, will help quell some of this bogus narrative. This decision helps level the playing field across retailers (once states start to adopt new laws) and should help us finally get to place where it’s no longer about multiple channels – its just retailing. I think it will also be a boon to retail investment, which has been subdued over the first half of the year, as cautious investors will find more value in retail properties. All in all, it’s a win for physical retailers and the landscape we should have where all sellers can compete evenly.
