U.S. Supreme Court e-commerce tax ruling is bad news for ‘mom-and-pop’, not Amazon

Profile picture for user slauchlan By Stuart Lauchlan June 24, 2018
Summary:
SCOTUS has made an important ruling on the collection of e-commerce sales tax, but it could be bad news for small retailers.

taxes
For months now, President Donald Trump has been ‘angry tweeting’ about Amazon and the alleged damage it’s been doing small businesses in the U.S.

So a triumphant tweet following the Supreme Court’s ruling last week that could see American states imposing sales tax on e-commerce transactions was inevitable.

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One problem - he’s wrong. Leaving aside that the enmity against Amazon seems rather more based on dislike of CEO Jeff Bezos as owner of the Washington Post, the ruling that the President is so pleased about is more likely to cause mom-and-pop businesses across America pain than it is the Amazonian behemoth he thinks it’s slaying.

The background - last week the U.S. Supreme Court ruled on a case called South Dakota v. Wayfair, overturning a 1992 decision, Quill v. Heitkamp, that determined that online retailers did not need to collect sales tax when there was no physical business presence in the state.

Forty-five states currently levy sales taxes - Alaska, Delaware, Montana, New Hampshire, and Oregon are the odd ones out. Following the ruling last week, individual states can now insist on collecting sales taxes in those states where retailers do not have that physical presence previously specified.

It’s been an ongoing debate for over a quarter of a century now, with bricks-and-mortar retailers complaining that the Quill v Heitkamp ruling handed e-commerce vendors a competitive advantage.

To an extent that’s true, but back in 1992 e-commerce was not the phenomenon it is today. It can equally be argued that the Quill decision helped fuel the growth of online retail, although over 25 years later, the time was more than ripe for an update of the rules to reflect the changed nature of the marketplace.

Why?

The Supreme Court was divided 5-4 in favor of revision. Justice Anthony Kennedy wrote the majority opinion, in which he stated:

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.

[The Quill decision] 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.

Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.

For the minority opinion, Justice John Roberts warned that the decision could disrupt a successful part of the U.S. economy:

E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. 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.

Meanwhile, fthe National Retail Federation, CEO Matthew Shay welcomed the ruling:

Retailers have been waiting for this day for more than two decades. The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it's time for outdated sales tax policies to change as well. This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.

Others were less convinced. Ed Black, president of the Computer & Communications Industry Association (CCIA) , noted:

CCIA has serious concerns about the future implications for e-commerce if governments are empowered to tax those who reside beyond their borders.

Who gets hurt?

So who’s right? A key point to note here is that while mainstream media headlines have followed the Trump line and argued this is a big defeat for the likes of Amazon, it really isn’t. Amazon, in common with most of the large e-commerce retailers, already collects sales tax in every state on goods it sells directly. It also has physical infrastructure, in the form of warehouses and logistics plants, in-state as well.

The companies that are likely to be impacted the most are small businesses who don’t have such infrastructure in place. So when a mom-and-pop outfit in one state sells online and ships to a customer in another, they’ll potentially be hit now with the sales tax collection burden.

South Dakota had tried its own fix, telling online retailers they only had to process sales tax if they had 200 or more transactions of at least $100,000 in the state each year. But this was rejected by online marketplaces like Wayfair and Overstock.com and led ultimately to last week’s Supreme Court decision.

Online marketplaces like eBay and Etsy are clearly in the firing line here. Sellers on such sites are also small businesses in the main and if they are disrupted, then the business model of the marketplace provider is as well. The same applies to third party vendors using Amazon as a channel to market.

Devin Wenig made his concern known in a series of post-ruling tweets:

eBay tweeting

 

 

 

 

 

 

 

 

 

eBay 2 tweets

 

 

 

 

 

 

 

Meanwhile Josh Silverman, chief executive of Etsy said:

While today’s decision is not the one for which we advocated, the Supreme Court did acknowledge the important difference between big internet retailers and the creative entrepreneurs on our platform. This opens the door for Congress to act and create a simple, fair federal solution for micro-businesses.

But whether Congress decides that this is a priority is open to question - and even if it does, it could be years before action is taken. A uniform process for collecting tax on internet sales has been an idea that’s bounced around Washington for over a decade already.

Beyond the U.S.?

The wider question is what happens beyond the U.S.? The issue of e-commerce tax isn’t something Isolated to America. According to a recent worldwide study by electronic payments specialist PPRO Group, the fastest growing markets for e-commerce are Indonesia (78%), Mexico (59%) and the Philippines (51%). Of course, that’s growth coming from a low starting-point. But even in more mature markets, there’s higher growth going on than in the U.S - India and China, for example, boast 27% year-on-year growth rates.

In India, new rules that were due to come into effect 1 July have been deferred for a further three months after having already been pushed back a year. The rules require e-commerce vendors to collect tax at source, but again critics warn that it’s the small businesses that will carry the pain, not the Amazons or Flipkarts.

The Indian authorities are concerned that the changes will damage indigenous vendors and help global players to increase their grip on the market. It’s important to get this right. In 2017, revenue from e-commerce amounted to $25 billion in India and is likely to hit $52 billion by 2022, according to a report by Admitad.

In the European Union, e-commerce is growing by 16% a year on average across the 27 member states. Legislating on digital tax has been a priority for the European Commission (EC) for many years, although there’s not been consensus among national governments on the subject.

At a summit this week, the Commission is pushing for progress on earlier proposal to put a 3% tax on digital turnover, a proposal that met with resistance from some states, most notably Ireland and Luxembourg which thrive on providing low-tax regimes.

While getting tax legislation pushed through has become a keynote policy for French President Emmanuel Macron, he’s not found enough support from allies to move at the speed at which he wants. Nordic states and Malta have objected to the idea of taxing turnover rather than profit. It remains unlikely that a harmonized approach to digital tax will be in place by the end of this year as was originally hoped.

My take

If you work in a store on Main Street and have watched the struggles in the retail sector since the rise of e-commerce went mainstream, then the Supreme Court decision last week will look like good news.

Wall Street certainly read matters that way. The likes of Walmart and Target saw their share prices rise, while Amazon, eBay and Etsy went down. That’s not the ‘new normal’ we’ve seen in recent years. Even non-US e-commerce providers were hit, such as the UK’s Asos, which currently pulls in 13% of revenues from the U.S.

But the ruling doesn’t clear up what is is a complex area. Trump has claimed that Amazon pays "little or no taxes to state & local governments" and has been "putting many thousands of retailers out of business." Even if that is true, this ruling isn’t going to change anything on that front - and is indeed likely simply to add to the pressure on smaller businesses.

(Incidentally, as several commentators have noted, there’s one online business that “pays little of no taxes to state and local governments” and that’s Trumpstore.com, which only collects sales tax in four states.)

It’s going to be up to individual states to decide if they require vendors to collect sales tax, but with the potential uptick in revenues that they could expect to see, it’s difficult to imagine many who won’t at least be exploring this idea.

There’s a need for Congress to stop prevaricating and engage in a proper debate on this subject, as well as seeking a harmonized decision that supports small business as well as recognises that there’s a need to accommodate the rise of e-commerce into the mainstream of the retail sector.