In a move that promises to put billions of dollars back into state coffers, the U.S. Supreme Court has ruled that online retailers must collect sales taxes even in states where they have no physical presence. The decision in South Dakota v. Wayfair Inc. reverses a 1992 ruling that banned states from forcing e-commerce sites to collect taxes unless the business had a brick-and-mortar establishment within the state.
In the 5-4 opinion, Justice Anthony Kennedy wrote that the previous decision cost states about $33 billion in lost revenue. While Amazon and other online retailers have been voluntarily charging sales taxes for years, the court’s decision is a game-changer for retailers both online and offline. Physical stores for years have decried the competitive advantage given to online sites that don’t have to collect sales taxes. In a tweet, President Donald Trump praised the change as a victory for consumers and retailers.
The Knowledge at Wharton radio show, which airs on Wharton Business Radio on SiriusXM channel 111, asked several experts to analyze the decision and what it means for online shopping. Katja Seim, business economics and public policy professor at Wharton; Mark Cohen, director of retail studies at Columbia Business School and former CEO of Sears Canada, and Richard Pomp, law professor at the University of Connecticut, discussed the case.
The following are key points from their conversation. (Listen to the full podcast using the player at the top of the page.)
The Court’s Ruling Was ‘Inevitable’
All three experts said they were not surprised by the Supreme Court’s ruling because the online sales tax issue had been bubbling up for years and finally came to a head with the Wayfair case. For states, the collection of sales taxes — whether online or offline — is a matter of fairness, they said.
“Once the Supreme Court agreed to hear the case, it was probably predictable that the Court was going to overturn the physical presence rule,” Pomp said. “Usually, when the Supreme Court decides to hear a case, it is to overturn lower court cases or its own precedent. So, the smart money was betting on this result in Wayfair.”
“The smart money was betting on this result in Wayfair.”–Richard Pomp
Cohen agreed, saying the physical presence rule has become moot as e-commerce has grown massively in the last two decades. The only surprise to him was how the court split, with Chief Justice John Roberts opining that the dispute was legislative and should have been sorted out by Congress.
“This really was, in all respects, an inevitability,” Cohen said. “I doubt this Congress could ever tackle an issue like this, as they have been unable to tackle virtually any kind of an issue lately.”
Seim added, “I wasn’t sure whether that was a legal matter versus policy matter to be resolved in Congress. [As for] the decision itself, I think it’s unclear how big the impact will be, but the fairness aspect to it seems reasonably clear to me.”
Online Sales Won’t See a Slump
The Wayfair decision is unlikely to affect online sales because consumers care about convenience far more than they worry about paying a few dollars more in taxes, the professors said.
“If you’re a macroeconomist, you would have to say, ‘People will buy less merchandise.’ But from a realistic point of view, I don’t think this is going to be noticeable or make any meaningful difference in the performance of the business at large,” Cohen said.
The strength of Amazon is its lack of cyclical sales, which is a pricing scheme that has gotten brick-and-mortar stores in trouble.
Pomp noted that stocks for Wayfair, Etsy, Overstock and other online marketplaces immediately dropped after the ruling was announced. Then the stocks bounced right back. That quick recovery indicates a certain level of confidence in the consistency of consumer behavior.
“My students shop out of convenience,” Pomp said, using his law students as an example. “They’re busy, especially when they become young associates having to bill 2,000 hours a year. It is convenience. Now, they may look for the lowest price, of course, but they’re not going into brick and mortar. They’re all shopping on the internet, sometimes at work, much to the consternation of their employers.”
Smaller Sellers Will Bear the Biggest Burden
While the court’s decision will have little impact on shoppers, it does create some challenges for smaller online vendors that will have to figure out how to calculate, collect and remit sales taxes. The professors said that niche could be filled by tech companies offering analytics and other kinds of assistance to smaller retailers needing to make structural changes to their web platforms.
The ruling also creates some potential administrative headaches for governments. It’s not clear from the opinion whether localities that levy sales taxes can also capture revenue from online sales, or how they would go about doing so.
Amid all the confusion is another looming issue: tariffs and a potential trade war.
“I don’t think this is going to change the direction of the tides with respect to the performance of the retail business,” Cohen said. “Overshadowing that is the specter of this trade war that could emerge and the issue of the imposition of tariffs. I think that may very well take a front seat to this issue in the next six to 12 months.”
Amazon Will Remain Unscathed and Unfazed
Amazon won’t even blink at the court’s decision because the online powerhouse has long collected sales taxes from its customers and has the structure in place to continue doing so. However, many of its third-party vendors that do not charge sales taxes will have to make some adjustments.
The decision is unlikely to affect online sales because consumers care about convenience far more than taxes.
Still, the experts said, there won’t be a shopping slowdown on Amazon.
“About 50% of transactions on Amazon are through third-party sellers, so that’s actually a pretty big share,” Seim said. “They may have to report basically price increases, so there may be a response to them. But I want to go back to the point that when you buy on Amazon, price is not the only thing you are shopping [for]. I think consumers are relatively inelastic, especially on that particular site. So, it’s unclear to me that the impact will be as significant.”
Cohen said the strength of Amazon is its lack of cyclical sales, which is a pricing scheme that has gotten brick-and-mortar stores in trouble. Those stores have trained their customers to wait for sales before buying. Cohen calls that “high/low madness.”
The online shopper’s “focus has shifted to shipping costs, both inbound and return shipping, and shipping policies or return policies,” he said. “The focus of 10 and 15 years ago, which was ruthlessly based upon price, has now moved away from just that. There are some voices out there that suggest that this is going to impact business. I don’t think so.”
Pomp rejects the idea that the ruling will create new barriers to entry for smaller vendors, especially those joining Amazon. The e-commerce giant will figure out ways to help them, he said.
“I think what we will see is that Amazon will start collecting, on behalf of the third-party vendors, the sales tax, and impose a commission for doing so, so that this is really going to create another profit center for Amazon,” Pomp said. “That’s what is most likely to happen.”