A Break for Brick and Mortar?

A Supreme Court ruling paves the way for taxing online sales. Crystal Allen, senior VP of retail services at Transwestern, weighs in on the implications for retail real estate.

Brick-and-mortar retailers and online players have been in a harsh competition ever since e-commerce began its unprecedented growth. According to an Adobe Analytics report, first-quarter U.S. e-commerce sales grew by 14.1 percent compared with the first quarter of 2017, reaching more than $100 billion in U.S. online retail revenue. Online retailers have been saving considerable amounts of money through tax advantages on top of a lack of physical presence, while shopping centers have been striving to survive. But things are starting to change.

The Supreme Court’s South Dakota versus Wayfair ruling started to shape the future of online retail. On June 21, the Supreme Court ruled 5-to-4 that states can require online sellers to collect sales tax, whether they have a physical presence in the state or not. So far, 10 states—including Michigan, Illinois, Washington and Minnesota—enacted online sales tax collection. This means that online retailers must track sales and tax law changes in every state in which they do business. While this means additional costs and efforts for them, traditional retailers hope to see increased foot traffic in physical stores. 

Changing a precedent

In 1992, North Dakota sued Quill, a mail-order office supply retailer, for unpaid North Dakota sales tax on orders shipped to clients in the state. Citing a 1967 case as precedent, the Supreme Court decided that the company was exempt from collecting sales tax because the retailer had no physical presence in North Dakota. Eventually, the ruling highly benefited e-commerce.

Crystal Allen, senior vice president, Transwestern (Image courtesy of Transwestern)
Crystal Allen, senior vice president, Transwestern (Image courtesy of Transwestern)

In June 2018, the Supreme Court overturned the decision taken 26 years ago, stating that retailers with no physical presence are no longer exempt from paying state sales taxes. The landmark ruling might help brick-and-mortar regain its shine and impact entrepreneurs, major retailers, small businesses and consumers alike. Moreover, it helps state governments raise millions in sales tax revenue. Commercial Property Executive talked to Crystal Allen, senior vice president of retail services at Transwestern, about the implications this ruling has and changes it might bring going forward.  

What are the main changes this Supreme Court decision will produce in the retail industry? 

Allen: Ultimately, if all online retail sales are taxed it will impact the retail industry in many different ways and to many different degrees. The largest impacts will be to all of the rapidly expanding, privately held e-commerce brands and to local crafts that solely operate online.

How do you expect major retailers to react? 

Allen: Large corporations such as Amazon and Wayfair that generate all or a majority of their sales online understand that they have enjoyed an unfair advantage, so the public reaction has been that retailers are prepared for the change and it will not negatively affect their business model. Large retailers whose sales mostly come from brick-and-mortar stores, like Walgreens, will likely embrace the change as an attempt to level the playing field.

How could online shoppers react? 

Allen: Online shoppers will directly be affected. The change will become more obvious with large, expensive purchases such as mattresses, jewelry, furniture and electronics. Historically, people preferred to touch and feel these kinds of items before purchasing, but a portion of those sales moved online because of competitive pricing. Now, if buying online adds a large tax fee, it may cause people to return to a store for purchases.

How do you anticipate e-commerce to change following this decision?

Allen: Ultimately, people are not shopping online to avoid paying taxes. All the advantages that have attributed to the boom of e-commerce sales over the past two decades, such as convenience, broader choices, and ability to compare prices, are still just as relevant.

How will this decision impact small retailers? Do small business owners need to brace for extra costs?

Allen: This decision is wonderful news for small brick-and-mortar retailers that already charge sales tax and pay real estate and inventory taxes. Hopefully, this will lessen the competitive advantage that online retailers have over them. It will absolutely be necessary to have software that streamlines the process and calculates the tax when a billing address is entered. 

How could this tax be collected? 

Allen: One option is software that distributes the sales tax immediately at the time of sale. Another is sending a collective report of all taxes to the state in which the business is located and having them divide a payout as appropriate.

Do you expect brick-and-mortar retailers to rebound?

Allen: Strong brick-and-mortar retailers know they must offer consumers a high-quality product and a great experience to be successful. I do not believe this tax law is going to change that for the better or worse.