Brick-and-Mortar Gets a Break

By Laura Calugar

Photo by Marcin Kempa on Unsplash

In a trend with far-reaching implications, online retailers may be on the verge of losing a 26-year-old competitive advantage over brick-and-mortar retail. 

At issue is the U.S. Supreme Court’s June 2018 decision in the case of South Dakota vs. Wayfair. Reversing a 26-year-old precedent, the high court ruled 5 to 4 that states can require online merchants to collect sales tax. The ruling reversed the court’s 1992 decision in Quill Corp. vs. North Dakota, which stipulated that a retailer was exempt from collecting sales tax because it had no physical presence in the state.

Since the most recent ruling, 10 states—including Michigan, Illinois, Washington and Minnesota—have enacted online sales tax collection. Online retailers must track sales and tax law in every state where they conduct business. Traditional retailers hope the landmark ruling will encourage more shoppers to patronize brick-and-mortar stores.

The ruling could help level the playing field for brick-and-mortar retailers, which have been locked in a fierce competition since e-commerce began its unprecedented growth. According to an Adobe Analytics report, first-quarter U.S. e-commerce sales grew by 14.1 percent compared with the first quarter of 2017, reaching more than $100 billion in U.S. online retail revenue. Crystal Allen, senior vice president of retail services at Transwestern, spoke with CPE about the ruling’s potential impact. 

New precedent

Crystal Allen, senior vice president, Transwestern (Image courtesy of Transwestern)

What are the main changes this Supreme Court decision will produce in the retail industry? 

Allen: Ultimately, if all online retail sales are taxed, it will impact the retail industry in many different ways and to many different degrees. The largest impacts will be to all of the rapidly expanding, privately held e-commerce brands and to local crafts that solely operate online.

How do you expect major retailers to react? 

Allen: Large corporations such as Amazon and Wayfair that generate all or a majority of their sales online understand that they have enjoyed an unfair advantage, so the public reaction has been that retailers are prepared for the change and it will not negatively affect their business model. Large retailers whose sales mostly come from brick-and-mortar stores, like Walgreens, will likely embrace the change as an attempt to level the playing field.

How could online shoppers react? 

Allen: Online shoppers will directly be affected. The change will become more obvious with large, expensive purchases such as mattresses, jewelry, furniture and electronics. Historically, people preferred to touch and feel these kinds of items before purchasing, but a portion of those sales moved online because of competitive pricing. Now, if buying online adds a large tax fee, it may cause people to return to a store for purchases.

How do you anticipate e-commerce to change following this decision?

Allen: Ultimately, people are not shopping online to avoid paying taxes. All the advantages that have attributed to the boom of e-commerce sales over the past two decades, such as convenience, broader choices, and ability to compare prices, are still just as relevant.

How will this decision impact small retailers? Do small business owners need to brace for extra costs?

Allen: This decision is wonderful news for small brick-and-mortar retailers that already charge sales tax and pay real estate and inventory taxes. Hopefully, this will lessen the competitive advantage that online retailers have over them. It will absolutely be necessary to have software that streamlines the process and calculates the tax when a billing address is entered. 

How could this tax be collected? 

Allen: One option is software that distributes the sales tax immediately at the time of sale. Another is sending a collective report of all taxes to the state in which the business is located and having them divide a payout as appropriate.

Do you expect brick-and-mortar retailers to rebound?

Allen: Strong brick-and-mortar retailers know they must offer consumers a high-quality product and a great experience to be successful. I do not believe this tax law is going to change that for the better or worse.