On Thursday, the US Thursday Supreme Court issued a decision in a closely-watched case that overturned a prior ruling that online retailers have relied on to avoid collecting sales tax on online purchases.
As Reuters explained, “In a 5-4 ruling reviving a South Dakota law challenged by Wayfair Inc, Overstock.com Inc and Newegg Inc, the justices overturned a 1992 high court precedent that had barred states from requiring businesses with no ‘physical presence’ there, like out-of-state online retailers, to collect sales taxes.”
The South Dakota law requires out-of-state online retailers to collect sales tax if their sales to South Dakota sales reach $100,000 or they hit 200 separate transactions.
The ruling is expected to pave the way for other states to more aggressively pursue sales tax collection from mid-size and large online retailers, but will the ruling actually dent ecommerce in the US? The answer: most likely not.
Here are five reasons why.
Online retail is way too convenient
Thanks to the investments online retailers have made in customer experience, as well as services like Amazon Prime, countless consumers have become accustomed to the convenience of being able to shop from a computer or mobile device and having their purchases delivered to their door, in some cases on the very same day, and in many cases, within no more than two days.
While this doesn’t mean there is no opportunity for brick-and-mortar retailers to compete with online, the convenience factor creates a very high bar that’s not easily overcome.
A lot of buyers are already paying sales tax
While there does exist a group of extremely price sensitive shoppers whose purchasing decisions might be altered by sales tax, the reality is that a lot of online shoppers are already paying sales tax.
Online retail’s 800 pound gorilla, Amazon, for instance, collects sales tax in 47 of the 50 US states. Other major retailers, such as Walmart, similarly collect sales tax on online purchases in many states.
The ruling didn’t directly address third-party sellers
Some online shoppers might be surprised to learn that Amazon, Walmart and others charge sales tax in most states because they’ve made purchases from these retailers for which they paid no tax.
The reason: Amazon and other online retailers that operate marketplaces through which third-parties sell to consumers generally don’t collect sales tax on behalf of those sellers. Marketplace sales now make up over half of Amazon’s sales in terms of units sold, so many customers are unaffected by Amazon’s sales tax compliance.
The Supreme Court’s ruling didn’t speak directly to the responsibility of online retailers to collect sales tax for marketplace sales, which means that many online purchases will likely still go untaxed.
As Paul Rafelson, a law professor at Pace University, told CNBC, “Amazon can hide behind its marketplace to claim tax exemption because it’s still going to pretend it’s not a retailer — and not responsible for collecting sales taxes.”
Based on its opinion, it would appear that the Supreme Court would prefer that Congress address this and related issues, which given the gridlock in Washington DC means it could be some time before these issues are actually addressed.
Offline can’t beat online when it comes to selection
Sometimes less is more, but when it comes to many retail markets, more is better as far as customers are concerned.
Clearly, a physical store can be home to a limited number of SKUs, whereas an online retail website can be home to a virtually unlimited number of SKUs. In other words, online handily beats offline when it comes to selection size. And the gap is only increasing as many brick-and-mortar retailers downsize their physical locations to cut costs.
Brick-and-mortar retail has already been crippled
While there are brick-and-mortar retailers that are successfully transitioning into multi-channel and omnichannel retailers without abandoning all their physical locations, there is no disputing the fact that brick-and-mortar retail has experienced significant decline.
Credit: Random Retail via Flickr
The evidence of this is not hard to find. For example, store closings have led to dead malls, particularly when one looks at class B and C malls. As a consequence, even if sales tax led some shoppers to reconsider their online purchases in favor of a brick-and-mortar, their brick-and-mortar options aren’t what they were even a few years ago.