The Supreme Court's Decision on Online Sales Taxes Will Reshape Retail -- Again
In 1992, the Supreme Court set a precedent -- Quill Corporation vs. North Dakota -- that unintentionally shaped the future of commerce.
The case was started when North Dakota sued Quill, a mail-order office equipment retailer, for unpaid North Dakota sales tax on orders shipped to customers in the state. The Supreme Court, citing a 1967 case as precedent, ruled Quill’s mail order sales were exempt from collecting sales taxes because the retailer had no "physical presence" in North Dakota. That ruling, two years prior to the first recorded internet retail sale in 1994, benefited what eventually became a major industry disruptor: ecommerce.
That benefit was a fluke but has still been a benefit all the same. Just this month, the Supreme Court overturned its 1992-set precedent, stating that retail stores with “no physical presence” are no longer exempt from paying state sales tax. The landmark South Dakota v. Wayfair, Inc. decision has the potential to drastically change the reliance of shoppers on ecommerce and give brick-and-mortar increased opportunity in a market that has more recently been focused on digital.
Thanks to this SCOTUS decision, South Dakota will collect approximately $50 million annually from the ecommerce sales tax, helping to make up for the many years of lost revenue from online-only retail businesses. If other states jump onboard (for the five states without sales tax the decision is moot), online shoppers will see their state’s respective sales tax percentage added onto their bill. This will help level the market landscape. Brick-and-mortar retailers, cleared of an important disadvantage, should capitalize by leveraging technology to enhance the in-store shopping experience.
On the other hand, ecommerce platforms will have to shift their strategy to retain and attract their customers online.
In the beginning, ecommerce had the edge.
When ecommerce was in its infancy, the sales tax exemption gave the new technology a critical edge, albeit unintentionally. But now, as a mature aspect of the retail industry, that competitive advantage is no longer justified. Even Amazon has acquiesced. It collects sales taxes on its merchandise but not third-party items. The decision is likely driven by the need for Amazon warehouses in all states, as opposed to fairness.
With this ruling, traditional retailers can embrace the change by finding new and innovative ways to lure customers back in-store. Consider retailers like Zara that are relying on emerging technologies such as big data, AI, AR/VR and data analytics to strengthen the in-store experience and attract customers.
To appeal to consumers, physical retailers can push promotional campaigns that speak to the benefits of coming into the physical store. For example, to provide an incentive for coming in-store, retailers can waive shipping fees for customers who choose to buy online and pick up in-store -- they might purchase additional items during their visit. Once there, businesses can use technology to provide a tailored in-store experience. After all, enhancing the in-store experience is especially pertinent now that there is no real monetary benefit to ordering online.
Ecommerce must evolve.
According to CNBC, "Big box retail stores, like Target, Best Buy and Walmart, support this new tax because it's a way to burden small competitors, potentially putting some out of business." Online retailers must begin strategizing and employing tactics to gain and maintain customers by including tax in their prices to seem as though no extra costs are coming out of pocket.
The SCOTUS ruling may help smaller ecommerce retailers by looping them into the tremendous revenue of tax-free days, like those around back-to-school, while local governments may look to find loopholes and drive retail foot traffic with “no state sales tax” weekends. States and retailers may even enact new programs where they waive or pay the sales tax if the product is bought online and picked up in store.
Any way you slice it, do not expect consumer behavior to change overnight. The modern consumer is addicted to online shopping. Adding sales tax to the price will not impact that immediately, but retailers of all kinds will need to invest in diversifying their sales channels to provide cohesive experiences online, in-store and everywhere in between.
In retail, the only constant is change.
The South Dakota v. Wayfair, Inc. decision did not come out of the blue. The issue has been in the courts and on the minds of retailers for quite some time, so retailers should have a contingency plan in place already. The key takeaway here is that SCOTUS has finally (and publicly) realized that the retail world has drastically changed over the past 25 years.
The original SCOTUS decisions that preceded were correct for their time, just as today’s decision aligns with the market’s current maturity. States need the revenue, and consumers cannot be expected to pay usage tax voluntarily. Overall, the decision will prove beneficial, but in the long term, retailers who partner with technology companies to stay ahead of the curve (and their customers) will continue to thrive.