It’s official. The individual states that make up this nation can now insist that ecommerce companies like Amazon (NASDAQ:AMZN), Wayfair (NYSE:W) and Overstock.com (NASDAQ:OSTK) collect and remit online sales tax for goods sold to those states’ residents.
The U.S. Supreme Court made the online sales tax decision on Thursday, overturning a rule that had been in place since 1992. That rule effectively gave internet sellers a free pass on the matter as long as it didn’t have a physical presence in the state in question. Now, selling is selling and subject to taxation, no matter where the item is being shipped from or to.
Each state will decide for itself if it wants to pursue the matter, but with a total of more than $13 billion and maybe as much as $33 billion worth of online sales tax revenue up for grabs, most states likely will.
The question is, what might this mean for internet retailers going forward? (Answer: Not quite as much as you might think.)
No Escape from Online Sales Tax
Other states can thank South Dakota for pressing the issue. It filed a lawsuit in 2016 against Wayfair, Overstock.com and consumer-technology ecommerce site Newegg in 2016 that would insist on each of those venues collecting sales tax on goods sold to South Dakotans.
The U.S. Supreme Court ultimately agreed with the state, though just barely, with five the nine-judge court saying the growth of ecommerce over the course of the past 25 years has made it necessary to rethink the industry’s exemptions.
Justice Anthony Kennedy explained in the majority opinion write-up “The Internet’s prevalence and power have changed the dynamics of the national economy. The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes.”
While states now have the right to require the collection of online sales tax via at the point and time the sale is made, the wrangling may not be quite over yet. John Roberts, who dissented with the majority, notes “Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”
A Congressionally-driven change to sales tax collection rules may still be in the cards.
Also still undecided is to what extent smaller online sellers that utilize platforms like Amazon.com and eBay Inc (NASDAQ:EBAY) would be subject to the new rules set by each state. In many cases, it can cost a state more to process remittances than the remittance itself.
Impact on Amazon and Peers
As for the impact the decision might have on companies in the e-commerce business, there may not be much of one. Indeed, in some regards it might help them.
Most regular Amazon shoppers will likely recognize that many of the purchases made online already impose state sales taxes for all 45 states that impose a sales tax.
Amazon only charges an online sales tax, however, on its own inventory of goods for sale. Third-party resellers, which manage and ship goods from their own warehouses often don’t charge sales tax. But, Amazon itself is out of that transaction loop.
Those smaller merchants are most at risk of the new laws, which will make them less price-competitive with Amazon’s own merchandise. If the smaller players are priced out of business, that leaves more business for Amazon, and at a higher margin.
Overstock.com isn’t apt to be as shell-shocked by new sales taxes either, as it already collects state-based sales tax on about 80% of the goods it sells.
There’s also the not-so-small likelihood that the competitive advantage of not charging online sales tax isn’t actually the underlying reason consumers shop online.
As former Sears Canada CEO Mark Cohen opined the ruling “puts an end, I think, to the ongoing sniveling and whining on the part of legacy organizations that ecommerce players have had an unfair advantage, whether they had an unfair advantage or no. That kind of distortion is now clearly over.”
Harsh words, but a valid point. Too many brick and mortar retailers have forgotten that shopping is (or used to be anyway) an entertainment experience as much as it is a transaction.
Bottom Line on Online Sales Tax
Yes, there will be some sort of impact from the Supreme Court’s decision about how each state can handle the online sales tax matter. Each state will handle it for itself, but each state does indeed now have a clear authority do so. As was noted, however, in most cases those taxes were being collected and disbursed to states anyway.
Most at risk are the small business that enjoy a little bit of scale, but not a lot of scale.
South Dakota’s standard says it doesn’t even want to bother requiring sales tax collection on businesses doing less than $100,000 worth of business per year in that state. Most other states use similar thresholds in deciding what’s worth pursuing, and what isn’t. That protection of the smallest of small business isn’t apt to change.
For the slightly larger companies, however, that do enough business to pose an actual threat to Amazon and Overstock (but don’t have enough scale to absorb the higher costs they’ll now have to pass along to consumers) their future is less certain. They’re caught in the middle.
Meanwhile, eBay, which consists only of third-party sellers, may soon have a logistical hurdle to clear if states decide that the platform rather than the seller is responsible for the collection and remittance of sales taxes. It’s still not entirely clear how most states will choose to address their newly-affirmed taxation powers.
However it’s going to shake out, there’s more noise than actual substance to the matter.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.