Advertisement

Bricks-and-mortar retailers get a boost from Supreme Court decision favoring online sales taxes

Bricks-and-mortar retailers get a boost from Supreme Court decision favoring online sales taxes
Packages travel on a conveyor belt for sorting at Omaha's main post office in November. (Nati Harnik / Associated Press)

Walmart Inc. has been aggressively building up its e-commerce site in the last two years as the nation’s largest retailer challenges online giant Amazon.com Inc. and other internet mass merchants.

But Walmart still operates 4,761 Walmart stores and 597 Sam’s Clubs stores in the United States that are susceptible to being undercut on price by online rivals that in some cases legally don’t have to collect sales tax.

Advertisement

That’s why Walmart cheered when the U.S. Supreme Court ruled Thursday that states and localities may require the collection of sales taxes on all purchases over the internet — whether they have a physical presence in the region or not. The ruling in effect standardized the basic sales-tax rules for traditional physical retailers and online stores.

“We applaud the Supreme Court for closing a loophole that has existed for over two decades and produced an uneven playing field for Main Street businesses,” Walmart said.

“Local communities are also the winners because they will now be able to collect sales-tax dollars owed and needed to fund public services,” the chain said.

Other bricks-and-mortar retailers joined Walmart in welcoming the decision on grounds that the ruling brings a level of fairness to the marketplace, where physical stores aren’t placed at a competitive disadvantage simply because they must add sales tax to products as required by law.

The tax discrepancy is just one reason why dozens of retailers, facing an onslaught of competition from Amazon and other online stores, have folded, filed for bankruptcy or scaled back their operations in the last two years. They include Toys R Us Inc., Sports Authority Inc. and Gymboree Corp., and their troubles have resulted in hundreds of store closures and gaping holes in many U.S. shopping centers.

Indeed, S&P Global Ratings said the Supreme Court ruling “may also help local retail malls avoid a competitive disadvantage, potentially supporting local government assessed values and downtown commercial cores.”

“Today’s decision is a positive step toward creating a level playing field for retailers,” Tom McGee, president of the International Council of Shopping Centers, a trade group, said in a statement.

With the ruling, physical retail stores have one less reason to cite for their financial problems, said Edward Yruma, an analyst with KeyBanc Capital Markets.

“They have, in some ways, been hiding behind excuses like a tax differential,” Yruma said, noting that many consumers now prefer online shopping as much for convenience as for price.

U.S. consumers in the future might see a higher tab for goods bought on the internet as a sales tax becomes more uniform for online merchants.

Amazon, for example, now collects sales taxes across the country in states that have a sales tax and where Amazon has a physical presence with distribution centers or other facilities, such as California. Until Thursday’s ruling, that physical presence was a key criterion for collecting a sales tax.

“Amazon had pretty much decided to start charging, collecting and remitting sales tax for those jurisdictions that imposed a sales tax,” said Gregg Wind, a partner at the accounting firm Kallman, Thompson & Logan in Los Angeles.

But a sales tax often was not collected on purchases made from third-party sellers that appear on Amazon's website, and critics contended that gave the web platform a price edge over other retailers that are required to collect a sales tax.

The ruling will have a major effect on Amazon’s third-party sellers, who will now have to calculate sales taxes from locality to locality for each transaction. Those third-party sales account for about half of Amazon’s total sales, according to S&P Global Ratings.

Advertisement

“This is not good for small businesses” operating online, said Mark Faggiano, chief executive of TaxJar, a Boston company that helps e-commerce sellers manage sales taxes. “It’s a huge burden.”

Amazon offers sellers software that helps them calculate sales taxes for each customer depending on their location. But Faggiano said the software helps those sellers remit the collected taxes to government agencies in only three states: Washington, Oklahoma and Pennsylvania.

Amazon did not respond to a request for comment.

The effect of the ruling “is likely going to be substantial” on internet firms, said Jeffrey LeSage, Americas vice chairman for taxes at the audit and tax advisory firm KPMG.

“Businesses will now need to prepare to closely examine and retrofit their operations to determine where they have to collect tax, whether their goods are taxable, and how they are going to handle the new tax computation, filing and remittance obligations,” LeSage said in a statement.

Regardless, the high court’s ruling is unlikely to put Amazon — which had sales of $178 billion last year — at much of a disadvantage, said Tuna Amobi, an analyst at CFRA Research.

“We see a relatively limited exposure” for Amazon, “which already collects a sizable amount of sales taxes across many states where it qualifies as taxable due to its sufficiently large physical presence,” Amobi said in a note to clients.

Amazon, he added, “is unlikely to cede a meaningful portion of its market share to traditional retailers as a result of the ruling, which could leave smaller online retailers more exposed.”

Amazon’s shares slipped $19.86, or 1.1%, to $1,730.22 on Thursday, while EBay fell $1.25, or 3.2%, to $38.01 and Walmart edged up 60 cents, or 0.7%, to $84.21.

The U.S. Government Accountability Office said in November it estimated that state and local governments could have gained as much as $13 billion in 2017 “if states were given authority to require sales tax collection from all remote sellers.”

The ruling might create more legal questions as states pass their own statutes to raise more of that online tax revenue, said Bruce Ely, a tax attorney at the law firm Bradley Arant Boult Cummings.

In addition, the ruling might spur Congress to pass a law setting federal standards for all retail tax collections. Walmart said it expects to “work with Congress and state legislatures to help ensure a level playing field exists for all retailers.”

Bloomberg contributed to this report.

3:50 p.m.: This article was updated with staff reporting throughout, including details on retailers’ and analysts’ reaction to the ruling.

This article was originally published at 10:25 a.m.

Advertisement
Advertisement