In a decision that may open the door for more states to tax online purchases, the U.S. Supreme Court ruled 5-4 yesterday that South Dakota can mandate that Wayfair collect sales tax, even though the retailer does not have any warehouses or employees in the state. In the ruling’s immediate aftermath, the stock prices of Wayfair and other top online retailers, including Amazon and eBay, dipped. However, the actual impacts of the ruling are more nuanced.
The previous court decision that set the property or employees standard for sales taxes went into effect in 1992, when eCommerce was in its infancy. As eCommerce grew, 31 states implemented complex laws to tax Internet sales, according to the Tax Foundation. Yesterday’s decision validates a new and simpler way for states to force online retailers to collect sales taxes. It may eventually push Congress to pass federal legislation that would supersede the patchwork of state laws burdening online retailers.
Here is how the court decision impacts four groups: shoppers, large retailers, small/midsized retailers, and marketplaces.
Impact on shoppers: While eCommerce retailers collecting sales tax may dissuade some shoppers from shopping online, we expect the impact to be minimal. Price is often not the key driver when shoppers decide to buy online. The primary driver for online purchasing is frequently convenience. Shoppers are looking to avoid crowds, streamline their shopping routines, simplify their lives, or shop at their leisure wherever, whenever they want. Data from ShopperScape® about why shoppers shop for and buy holiday gifts online shows that the top four reasons for doing so relate to convenience, not price. Fewer than half of shoppers stated that “getting better deals online” is a reason for purchasing holiday gifts online, a figure that has been falling for the past several years. While some shoppers may see their online baskets getting slightly more expensive and closer to in-store prices with sales tax, online shopping’s convenience and simplicity will continue to be a differentiator for shoppers.
Impact on large retailers: The decision’s impact on large retailers with online platforms will be relatively small. Most large national retailers have been charging sales tax on their first-party sales as a standard practice because of their vast physical footprints (in terms of either stores or warehouses). For instance, Amazon has been charging a sales tax nationally on first-party sales since early 2017, so its retail operations will see a minimal impact. Major bricks-and-clicks retailers like Target, CVS, and Walmart with extensive store locations may feel some impact in states where they do not have locations, but given their more limited sales activity in these states, the impact will likely be minimal.
However, the decision may grease the wheels for faster shipping — a key reason Amazon added warehouses in more states despite the sales tax mandate. The court’s decision may force large retailers that had previously been reluctant to expand their physical presence to change their minds to improve shopper access.
Overall, expect the negative impact of the tax ruling to be more limited for the large national retailers, and potentially add to the efficiency of their operations in the long run.
Impact on small and midsized retailers: For smaller and midsized retailers, the impacts of the ruling will be more pronounced. These retailers are less likely to have been charging sales tax in a larger number of markets because of their more limited physical footprint. In addition to charging sales taxes, these retailers will face the burden of navigating tax laws in different states. In his dissenting opinion, Chief Justice John Roberts noted, “The burden will fall disproportionately on small businesses. One vitalizing effect of the Internet has been connecting small, even ‘micro’ businesses to potential buyers across the nation. People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country — but probably not if they have to figure out the tax due on every sale.” Expect smaller retailers to bear the brunt of the pain of the new ruling and to consider limiting their offers until systems and processes are developed that help them deal with these state nuances.
Impact on marketplaces: Marketplace platforms and marketplace sellers will also feel the impact of the tax ruling. Previously, marketplace platforms could push the responsibility of collecting sales tax, where required, to the sellers themselves. The platforms will have to respond to how states decide to collect sales tax and potentially have multiple systems and processes for sales tax collection. Marketplace sellers will also have to adapt to the tax-collection mechanics of each platform, and will likely face challenges similar to those of smaller retailers in navigating state-level tax dynamics. Additionally, marketplace platforms may increase their listing fees or commissions to account for the additional operational capabilities to collect taxes by state, which will further impact sellers.
- Work with your retail partners to understand any new policies or fees associated with state sales tax collection to determine any margin or pricing impacts.
- Understand how smaller retailers and platforms will change their operations or limit their offer to account for state sales tax nuances.
- If you sell on a third-party marketplace (such as eBay or Amazon’s marketplace), examine how your operations will need to change to respond to the nuances of state tax collection. Evaluate the platforms and processes needed to fuel these operations.
- Partner with retailers to develop content, programming, and campaigns that emphasize online retail’s convenience and develop offers that help streamline shopping.
For more information, please contact:
Christina Anderson, Associate Director, eCommerce and Digital
Doug Hermanson, Principal Economist