Many brick-and-mortar retailers hailed the Supreme Court’s ruling late last week that finally gave states the authority to require online retailers to collect sales tax. But interviews with a number of independent specialty retailers show many in the industry still face uphill battles competing with online selling.
The Court, in a 5-4 decision, overturned a ruling that e-commerce marketers only had to collect sales tax in states where they had some sort of physical presence.
States were among the clear winners, with the ruling promising to put billions of dollars back into state coffers. Forty-five states and the District of Columbia charge a sales tax ranging 5 percent to 9.98 percent. The five states with the highest average combined state and local sales tax rates are Louisiana (9.98 percent), Tennessee (9.46 percent), Arkansas (9.3 percent), Alabama (9.01 percent) and Washington (8.92 percent).
S&P Global Ratings further said the additional tax revenue “may also help local retail malls avoid a competitive disadvantage, potentially supporting local government-assessed values and downtown commercial cores.”
Surprising some, Amazon itself was seen as largely unaffected and a possible winner because the online giant already collects a sales tax in every state that has one. The online giant may be able to better compete against pure-play competitors that have not had to pay taxes.
Yet it’s uncertain how the ruling will impact how third-party sellers on online marketplaces collect sales tax. About 50 percent of transactions on Amazon are through third-party sellers on Amazon Marketplace.
The Advocates for Independent Business (AIB) pointed out that a recent study from Civic Economics the American Booksellers Association showed that sellers that are part of Amazon’s Fulfillment by Amazon program alone owed as much as $5 billion in uncollected sales taxes in 2016, and a recent report from the U.S. Government Accountability Office estimated that, among all platforms, third-party sellers collect just 14 to 33 percent of taxes on their sales. AIB wrote, “Through these third-party sales, Amazon continues to hold a significant competitive advantage over brick-and-mortar retailers.”
Small pure-play online sellers and mom-and-pop e-marketers were seen as most impacted by the ruling.
Smaller businesses may still earn exemptions from paying taxes, and legislation is expected to erupt before any guidelines change. But they may have to figure out how to calculate, collect and remit sales taxes. E-commerce industry group NetChoice promised a “summer of chaos” as small internet businesses struggle to comply with the conflicting tax rules of more than 12,000 local tax jurisdictions across 45 states.
The ruling was also seen a win for large retailers, who long argued the physical presence rule was unfair. Large retailers, including Apple, Macy’s, Target and Walmart, which have brick-and-mortar stores nationwide, already generally collect sales tax from their customers who buy online, as well as smaller independents.
“The Supreme Court ruling will level the field between brick-and-mortar stores and out-of-state online sellers by removing the sales tax loophole that has put stores at a price disadvantage for more than two decades,” said Larry Weindruch, director of public affairs, National Sporting Goods Association (NSGA). “Depending on the state, the ‘sales tax advantage’ held by remote sellers can be as much as 10 percent. Brick-and-mortar retailers don’t mind competition as long as it’s fair, and removing that sales tax advantage definitely levels the playing field.”
Weindruch added the ruling will not create a “new internet tax, but rather a sales tax that is already due in the 45 states with a sales tax, but not always collected. States will provide free software to remote sellers to enable them to seamlessly collect and remit sales tax to those states.”
But retail observers don’t believe the ruling will affect the robust growth being seen in online channels because consumers have grown accustomed to the convenience of online buying and value that more the lower prices that might have been made possible on a lower online tax rate. Beyond avoiding the hassle of heading to a store, online sites often offer a much-broader selection versus physical stores, 24/7 browsing, the appeal of user-generated reviews and increasingly free or inexpensive shipping.
John Rogers, principal at Fleet Feet Maine Running, is among those who believe the ruling would help level the playing field, especially since Fleet Feet carries higher-ticketed transactions, including running shoes as high as $180. But he believes the channel delivering the best customer experience ultimately wins the sale.
“I still believe it is still about the customer experience, whether it’s digital or in brick-and-mortar,” said Rogers. “We are working hard at creating an elevated in-store experience with our Fit ID, combined with strong community connection, that digital can’t compare with. However, that doesn’t mean digital isn’t experiential for customers; it just means you can’t get the same experience online that you can get in our stores.”
Said Bob Kennedy, owner of Athletic Annex Running Center in Indianapolis and a board member of the Running Industry Association (RIA), ”Most owners of running specialty stores that I know are hyper competitive and are just looking for a level playing field, and this decision by the Supreme Court is a good step towards that.”
Still, he also cautioned that the way consumers shop has changed dramatically over the last fifteen to twenty years, and online has become a much bigger part of the overall shopping experience, particularly discovery.
“Although a vast majority of consumer purchases are still made in stores, most consumer shopping experiences start online through a product or retailer search,” said Kennedy. “Independent store owners are working hard to shift with the consumer by creating their own websites, social media strategies and digital marketing plans while still directly connecting with the customers and the communities they operate in. Those are all changes and strategies within our control, and we will succeed or fail on our own accordingly. But when one retailer is required to collect sales tax and another is not, that is not a fair or level playing field and a significant disadvantage to local retailers as well as state tax coffers.”
Mike Massey, owner of Massey’s Outfitters in Louisiana and president of Locally.com, said that beyond any price advantage in conducting sales, the ruling will remove an advantage dot.coms traditionally enjoyed securing significant investments tied to the tax break. Said Massey, “That narrows the advantage in investment significantly over the coming 12 months.”
On the other hand, however, Massey said many traditional brick-and-mortar stores are still playing catch-up to online players in digital engagement.
“Digital firms still enjoy a huge gap in the ability to meet shoppers where they are shopping,” said Massey. “Decision-making eyeballs are almost entirely online now. Traditional media influence over the buying cycle has waned sharply. And digital marketers are enjoying a big advantage right now… which we at Locally would argue won’t last.”
Locally is an online platform that connects consumers with the products they’re seeking out for in local shops. Brands pay a minimal per-store subscription fee to have their merchandise show up on Locally’s platform. For independent retailers, the service is free, but they have to provide links to UPCs and inventory quantities.
Massey sees brick-and-mortar retailers tapping a variety of digital marketing and local logistics solutions to increase parity between online and offline purchase options. Added Massey, “Tax advantages going away is just another signal of the end of decades of disequilibrium … that and the fact that major retailers are posting nice sales increases surely signals that the brick-and-mortar-is-dying drums were too loud and too soon.”
Gear Coop, which has a store in Costa Mesa but does most of the company’s volume online, saw more positives than negatives in the ruling.
“With most of Gear Coop’s business online, the Supreme Court’s decision may seem to negatively impact us,” explained Terry Lee, Gear Coop’s CEO. “Quite the contrary: online retailers have been operating in a state of risk and regulatory uncertainty for years now, and we are very happy with the Supreme Court’s decision. This evens the playing field for everyone. However, states have a lot of work to do to streamline the process of reporting and payment, to make it feasible for online retailers to comply.”
Bryce Phillips, founder and CEO of Evo, shared similar sentiments. Phillips said, “For many years we’ve assumed that this was coming and quite frankly, it’s hard to believe that it took this long. We believe that it’s the right move and important given the multitude of needs that require funding nationwide. As for impact, of course it will be interesting to see. That said, we are feeling good about it having tripped nexus, as we’ve opened new stores (i.e. Denver), and also as a result of our growing La Familia network. To date, we have not seen a measurable drop in business once starting to collect tax on web sales in new states. It may sound funny coming from me, but I agree with the “unfair advantage” debate and net/net, believe this is a good outcome.”
“Grassroots Outdoor Alliance is thrilled over this change in the tax law,” said Rich Hill, president, Grassroots Outdoor Alliance. “Clearly, it is a win for local specialty retailers. But it is also a win for local communities, and ultimately for consumers, who, given a fair playing field, are choosing their local retailer as their source for expert opinion and preferred purchase location.”
Hill believes some of his organization’s members might face challenges collecting taxes as they’ve expanded their websites to sell across states. Stated Hill, “In all transparency, this ruling will not be universally praised by all independent specialty retailers. There are a number of local stores that have developed robust national online businesses, and this tax law change will require substantial adjustments to their business models and systems.”
Terry Schalow, executive director, Running Industry Association (RIA), described the ruling as “certainly a step in the right direction” while also noting that many issues still exist that put brick-and-mortar retailers at a disadvantage to online sellers. He said, “The internet is rife with sellers, whether authorized or unauthorized, who actively seek to gain a competitive advantage by ignoring brand pricing policies. The sheer numbers of sellers can be incredibly difficult and costly for brands to manage. Even with aggressive brand protection policies, policing online cheating has become an un-winnable game of ‘whack-a-mole.’”
Schalow added that another, less visible advantage that Amazon in particular enjoys is incentives that local municipalities extend when Amazon opens a local warehouse. Said Schalow, “Amazon typically will demand infrastructure improvements to build a warehouse, and those costs are often paid for by, you guessed it, local businesses, in the form of higher taxes. The RIA is fighting this by providing information to our members that they can pass on to local government. Our goal is to ensure that municipalities understand the real costs of allowing a local Amazon warehouse.”
Kent Cranford, owner of North Carolina’s Motion Makers Bicycle Shop, said the “nearly 10 percent immediate discount” in some states has been particular detrimental to the cycling industry. Many smaller cycling parts can be “very expensive” yet shipped easily and have been particularly prone to being found much cheaper online the aid of the tax break.
“While we don’t ship bikes on a regular basis because of many reasons, there are many bike brands available to be shipped that don’t have a retailer network whose low prices are only amplified by the sales tax savings,” said Cranford. “This decision will help to align some of the pricing discrepancy that is out or the retailers control.”
Like others, Cranford admitted that online has changed retail and Motion Makers Bicycle Shop has made investments to “make sure that our customers can easily shop our offerings from their sofa and come in when they are ready to make the purchase.” The three-store chain also works with Locally and SmartEtailing’s Buy Local feature so that brand websites can direct customers to a Motion Makers’ location.
Cranford, however, said the bike industry is also maligned by too many brand managers violating MAP policies to hit sales goals with the discounts typically higher than any savings from the sales tax discount.
“Most of the brands have gotten better in the last few years as those policies have become more effective, but it’s not hard to find frequent violators,” said Cranford. “The biggest brand devaluers come from outside the U.S. and continue to cause all retailers a headache as some of the biggest bike industry brands continue to say they can’t do anything about, while others have done a good job.”
“The Court’s ruling is long overdue, but it’s a welcome step in the right direction for independent businesses,” said Olivia LaVecchia, a senior researcher at the Institute for Local Self-Reliance, a national nonprofit that advocates for policies that level the playing field for independent businesses and works with the Advocates for Independent Business coalition.
Added LaVecchia, “With this decision, the Court finally gives states the authority to close what’s effectively been a tax loophole for big online retailers like Amazon. Research has found that this loophole has played a central role in the growth of Amazon in particular. Now, the Court’s ruling finally opens the door for states to enact sales tax fairness.”
LaVecchia noted that while the Court’s ruling gives states the authority to require online retailers to collect sales taxes, it’s uncertain how states will respond. Also unknown is whether states will require online marketplaces like Amazon’s to collect sales taxes on third-party sales made on their platform. Cautioned LaVecchia, “While this ruling is a victory for independent businesses, we still have to see how it unfolds in the states to know how much of a victory it is.”
Beyond the sales breaks, LaVecchia asserts that Amazon “in particular continues to wield its power” as the dominant online platform in ways that negatively impact fair and open competition. She charges, for example, that Amazon routinely takes the data of sellers who use its platform in order to compete against them. Said LaVecchia, “Because of the lack of meaningful competition in online retail platforms, however, or federal regulation of Amazon’s platform as a common carrier, businesses that want to sell online are increasingly stuck depending on an aggressive competitors for the infrastructure that they need to reach their market.”
Tracy Gibbons, president of Sturtevant’s with stores in Bellevue and Tacoma, WA, likewise sees benefits to state and local businesses, but is also unsure whether it will alter recent buying patterns. Said Bibbons, “I do believe consumers shop online for convenience and price, but not sure how often the ‘tax’ portion of that ‘price’ ultimately play in their final decision.”
She adds, “Our main office and store are located in Bellevue, WA, where the tax rate is 10 percent, so as the tax laws take hold it will be interesting to see if we notice a difference in either our online or in-store. But either way I believe this is a positive change that was needed to better balance the retail landscape as the internet continues to develop and change how consumers purchase. Consumers in our area do want to ‘support local,’ and I am sure this will help them feel even better about supporting their local businesses.”
John D. Mead, president of Adventure 16, was among those who wished such as ruling came much earlier.
“I think this decision finally levels the playing field,” said Mead. “Yes, it will help the local shop. However, at this late date, I don’t feel it will make much of a difference because the comfort level of people buying online has reached a critical mass, and for good reason.”
He believes the sales tax break gave a “great early advantage” in establishing online retailers and helped them ramp up quickly and to continue to attract capital. He added, “What I see going forward is that the players (both retail and online) with the newest, niftiest and most powerful technology will continue to earn market share and take even more of the bread-and-butter business from the shops on main street. Also, the direct channel will grow nicely as well.”
Mead said retail continues to evolve and those “able to do the best job cutting out the middle man and leveraging technology to acquire, manage, market and sell inventory have always seen the most success.” He believes that online and retail’s emerging technologies are reinventing the business model, just as Sears & Roebuck did around the turn of the last century and Wal-Mart was able to do in the 60s and 70s.
Concluded Mead, “I do see there being plenty of chances for the small independent omni-channel retailers to thrive as long as they can also leverage technology as they create well-placed shops that are trustworthy and that are meaningful places for like-minded and spirited communities to gather, get inspired and spend money.”
Photo courtesy Amazon