Brick & Mortar Retailers achieve level playing field- sales tax

10 Replies

The Supreme Court delivered a major victory to the retail real estate industry on Thursday, ruling that states can require most online retailers to collect and remit sales taxes. This overturns an earlier decision holding that companies lacking a physical presence in the state could not be required to do so.

The 5-4 ruling is also a victory for U.S. states, which have been deprived of billions of dollars annually that would otherwise have gone toward the construction and maintenance of infrastructure, education and other vital services.

“Today’s decision is a positive step towards creating a level playing field for retailers, and it will serve to strengthen the industry as a whole for years to come,” said Tom McGee, president and CEO of ICSC. “The physical-nexus standard hampered industrywide competition and kept valuable tax revenues from local communities. We understand this is a critical turning point in a long process, but [we] look forward to working with policy-makers and business owners to find state-level legislative solutions which promote fairness and competition.”

This most recent case concerned the constitutionality of a 2016 South Dakota law requiring out-of-state sellers with sales in excess of $100,000, or with at least 200 separate sales transactions into the state, to collect and remit sales taxes. South Dakota brought the case to the court, challenging the existing requirement that only retailers with a physical presence in a state — in the form of stores or warehouses — could be required to pay state sales taxes, as upheld in the previous Supreme Court ruling, Quill Corp. v. North Dakota, from 1992.

“Today’s decision is a positive step towards creating a level playing field for retailers, and it will serve to strengthen the industry as a whole for years to come”

Associate Justice Anthony M. Kennedy wrote the majority decision, which highlighted the problems caused by Quill and the previous standard: “ … Quill creates rather than resolves market distortions. In effect, it is a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers, something that has become easier and more prevalent as technology has advanced. The rule also produces an incentive to avoid physical presence in multiple States, affecting development that might be efficient or desirable.”

Associate Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel A. Alito Jr. and Neil M. Gorsuch all joined Kennedy in the majority.

Jennifer Platt, ICSC's vice president of federal operations and the head of the Marketplace Fairness Coalition, says the market-distortion issue is critical. “To have the Supreme Court rule on this issue, seeing the market distortion and change in the marketplace, is clearly a very big deal for our industry,” Platt said.

Chief Justice John G. Roberts Jr. wrote the dissent and was joined by Justices Stephen G. Breyer, Sonia Sotomayor and Elena Kagan.

Leveling the playing field States are now free to pass legislation requiring e-tailers to collect and remit sales taxes

ICSC and other organizations have advocated for years to have physical and online merchants treated equally where taxation is concerned, supporting legislation in Congress (most recently, H.R. 2193, the Remote Transactions Parity Act; and S. 976, the Marketplace Fairness Act), but Congress has failed to move forward with these measures.

Efforts have also been made to have states simplify their systems for sales-tax collection, but so far, only 24 states have signed on. Forty-five states currently have state sales taxes.

The ruling now opens the way for states to pass their own legislation requiring all retailers, physical and otherwise, to collect and remit sales taxes.

By Edmund Mander

Director, Editor-In-Chief/SCT

@Joel Owens it was time for this to change. The old ruling predated the internet and predated the Amazon effect. South Dakota has no state income tax, so it is only property taxes and sales tax that funds the state. The best argument the online retailers could come up with is that it is a burden to track and pay local taxes. Given the evolution of software to automate this, arguably collecting taxes in the digital age is very easy. 

I am really not sure there are any losers here. I doubt paying 6% tax will stop people from shopping online. Technically South Dakota state law required people to self declare taxes for online purchases already. My business was audited by the state for this exact issue and we had to show proof we had paid taxes, even if the vendor didn't charge it. All this ruling does is put the burden back on the sellers to collect. The $100,000 and 200 transaction limit keeps any super small business from having to comply. I don't think it is a windfall for local brick and mortar businesses, but at least it evens the playing field a little.

The problem is implementing 50+ different sales taxes, all changing yearly. It’s ‘easy’ for an Amazon to do it with teams of tax exporters. But small companies with an internet presence, how do you

- figure it out. How much to charge each person
- update the percentages monthly/yearly whenever a state decides to change their tax rate
-figure out which of your products require state sales tax added (note that it seems that some states are different)
- report, cut checks, and complete whatever forms needed for each state every month/quarter/year

I don’t mind paying sales tax when needed, and I don’t mind the concept of this bill/law, but as with most things, the devil is in the details.

Not a huge deal if every state charged

I do see this as a positive ruling.  I don't see it as having any significant effect on brick and mortar retailers.  And little, if any, effect on real estate.  I think it will have a positive effect for states and other tax-collecting entities.

IMHO, this is only one small factor in the decline of brick and mortar retail.  I think the most significant factor is choice.  In many cases, I can find far more choices online than at any local store.  Even if I find the same item locally its often cheaper online regardless of the sales tax situation.   Another factor is the experience.  If I go to a retail store, find what I want at a price I'll pay and its a pleasant experience I buy it.  I'm even willing to pay a little more that online, at least in some cases.  But if its a crummy experience, "hello?  hello?  anyone working here?" nope.  If I have to call to find out if they have something then traipse across town to buy it, nope.

This is really nothing new.  When I was a kid my dad had a hunting and fishing store.  They got bigger, but there came a day when Walmart opened a store nearby.  Walmart #21.  One of their reps came over and told my dad "we're going to put you out of business".  And they did kill his store.  He became more specialized and started selling at gun shows.  He ended up being very specialized and had a huge inventory of accessories, not guns.  No way would one store have survived in one location with that specialized inventory.  By traveling and selling to different sets of customers every weekend he did very well.  That's what online has become.

@Mike McCarthy I dont think it would be very difficult to adapt the changes. You already know the zip code that its shipping to, and they already calculate shipping instantly. With all of the data, it wouldn't be much to calculate. Then you automate the payments to the appropriate states.

@Joel Owens I agree with many of the other posters, about time! Make it a level playing field and stop denying the local areas of much needed tax revenues.

@Mike McCarthy I've built a lot of computer systems for dealing with various local taxes and I agree they can be complex. But I'm sure it's just an entrepreneurial opportunity. A bunch of companies will pop up to handle this for smaller retailers. Sort of like Square did for credit card payments. If a small retailer is really good, I doubt this will put them out of business. If they are marginal enough that this takes them out they probably were doomed anyway.

@Jon Holdman I generally agree with you that this is just a small factor in the overall theme of 'brick & mortar vs. online retailers. However all of the retail REITS I own reacted very positively to this news. Why? Because generally, whoever their tenant is will do better compared to their online only competitors. 

I continue to believe that the 'retail apocalypse' narrative in the mainstream media is completely wrong. Rather, the story is much more nuanced and hard to explain to your typical news consumer.

As you suggest in your post, whether you shop online from a computer at home, a phone while you're walking around or physically in a store is irrelevant, what is really important is three things. 1) Price you pay 2) Experience (did you have fun/not feel hassled while shopping) 3) Customer service - knowledgeable people to answer your questions, help you use the product and even just give advice on what the best product is.

Retailers that can do those three things well will win regardless of whether they are mostly physical stores or mostly online. 

Amazon knows this or they would not have bought Whole Foods. 

Actually, that makes me want to add a 4th thing, distribution, immediacy, can I walk away with the product I'm looking at right now.

for our state with no state sales tax obviously wont have an effect.. and I think once people get hooked on the online thing sales tax is not going to change them.

me personally I don't buy anything on line.. but there are box's on our porch virtually everyday.. :)

and especially food I would never subscribe to those boxed food services I like going to the store and picking what I am going to cook..  and I don't want a bunch of frozen stuff..

I got one of those packages as a gift and there was one Radish in a plastic bag I thought what a waste..

But what I really loved was buying our Teslas on line.... now that is the bomb.. no more car dealer BS.

the price is the price and you can literally have a new car bought in less than 30 minutes if your paying cash.

then they e mail you when its in the show room and ready to be picked up which depending on where your at or what model can be a matter of next day or a week or so out.. No up sell .. And if I was a competitor I sure would switch to this.. some brick and mortar do this like Dave Smith in Boise  he kind of pioneered this.. he beats anyones price and people come from all over the US to buy from him... just pop on the Tesla site and check it out.. very cool.

This will also keep benefiting states with no sales tax as well  Like here in Oregon half of the 1 to 3 million dollar motor coachs are built and sold in this state.. and airplanes are sold in this state as well and hangered here for some time before they go to their end destination.. sales tax on a 1 million dollar mortor home or a 10 million dollar jet is real money.

I can tell you this. Over 15 years I have built an extensive database of investors interested in retail real estate. The net worth combined from individuals is in the billions total.

I have not totaled everything up exactly over the years but should.

Retail is a juggernaut and it is not going anywhere. Is it changing with technology? It sure is but is still thriving. On a per capita basis U.S. has some of the most retail per sq ft out of any country.  Now in most growth areas even if a retailer goes out there are tons of new tenants lined up for the space especially in the sub 10,000 sq ft box space. It is in areas that are cold belt, or rural,etc. where overbuilding has occurred and when a tenant goes out it can take years to fill.

If  a buyer is looking at owning retail building then they can drive the area and look at vacancy versus new builds. If you see a lot of empty spaces and building with little new construction that is not a good sign. That can mean more product locally than the market can absorb. That stagnates rent growth and increases vacancy factors as landlords hyper compete to fill spaces.

What is most being affected is department store type retailers. The clothing space is overcrowded so many pop up and then are the trend of the month,year. Then the kids and adults are off to the newest trend and that brand is now in trouble. That just seems one of the toughest businesses ever to be in. You create excess inventory you then sell at a loss to get rid of hoping you made enough initially from the high margins to still turn an overall profit with the lines.

People might like to buy online but over 90% according to surveys cannot stand to return online. They do not want to deal with overseas workers for customer service. They do not want the item lost they tried to return but cannot be located. They do not want to wait weeks to finally process a credit back to them.

Instead they simply go to the store and instantly get a store credit or a refund and continue shopping that day. I usually buy in store unless I am purchasing a unique item. Places like Wal-mart they carry many items but want mostly volume sellers in store. They want to keep specialty items in the warehouse at less cost per sq ft with rents and then drop ship to the store or your house.

An example of this is black-out shades for windows. Home Depot when I went did not have them in store but I could order them to deliver to my house on their website. Occasionally we have a full to half moon that will shine through the master bedroom  and with regular blinds can be bright and harder to sleep well. I know you can do a night mask but I do not like things on my face when I sleep.  

Originally posted by @Mike McCarthy :

The problem is implementing 50+ different sales taxes, all changing yearly. It’s ‘easy’ for an Amazon to do it with teams of tax exporters. But small companies with an internet presence, how do you

- figure it out. How much to charge each person
- update the percentages monthly/yearly whenever a state decides to change their tax rate
-figure out which of your products require state sales tax added (note that it seems that some states are different)
- report, cut checks, and complete whatever forms needed for each state every month/quarter/year

I don’t mind paying sales tax when needed, and I don’t mind the concept of this bill/law, but as with most things, the devil is in the details.

Not a huge deal if every state charged

 There is software to automate this. It would be pretty much impossible to do it without software, since there are too many cities with their own tax rates that differ from the state. I am not sure what order entry software your business uses, but most have a local sales tax package. The biggest hassle is you need to keep the tax table updated, because it does change in many places over time. Usually you subscribe to updates as part of your software maintenance package.

I know you mentioned it would be better if every state changed. I suspect most every state with sales tax will pass laws that follow the South Dakota law. The SD law excludes you from having to collect taxes if your business does less than $100,000 in a state as long as it is not more than 200 transactions. My recommendation is even if the state doesn't require you to collect taxes, go ahead and do it in every state anyways. When the state does pass a law, you will already be in compliance. Amazon saw the writing on the wall some time ago and started collecting taxes before this ruling.