By Neil Saunders
From an economic perspective, the Supreme Court ruling on online sales taxes will come as a relief for states desperate for revenue. It will also be welcomed by those physical and omnichannel retailers which have a national presence and, therefore, already charge and remit sales tax in most states.
There are well over 10,000 tax jurisdictions across the U.S. This results in an extremely complex and intricate web of rules. While larger retailers will be able to cope, the challenge for smaller players will be significant.
The losers from the ruling are online-only retailers, especially smaller players, and consumers who will end up paying more for products. By our calculation, the additional costs for consumers could be up to $15.2 billion a year.
The concern for retailers like Wayfair is that their prices will now effectively rise across many states. This weakens one of their competitive advantages over both physical players and those larger online and omnichannel retailers which have more of a national presence. However, in our view, this outcome is fair. It means that retailers will now compete on a level playing field.
A more problematic issue is one of compliance. Because of county and city taxes, there are well over 10,000 tax jurisdictions across the United States. Within each, there are various exemptions and rates for different products. This results in an extremely complex and intricate web of rules, that will require a lot of processing by retailers in order to calculate the taxes owed to each state and locality.
While larger retailers will be able to cope with this, it will still impose an initial burden on them which may further increase costs that could be passed on to consumers. That said, this is nothing that physical retailers operating across multiple locations don’t already have to deal with. The challenge for smaller players will be significant and the concern here is that complexity could stymie innovation and entrepreneurialism. However, in our view, most states will likely exempt smaller players and, even if they don’t, their small scale will probably allow them to escape scrutiny.
As unfortunate as these problems and consumer losses are, the Supreme Court’s ruling and negation of previous judgments which prevented the taxation of some online transactions by states, is correct and valid. The Court cannot and should not concern itself with practicality. It must only concern itself with the law and the Constitution.
In that regard, the judgment is reasonable. Provided states do not engage in discriminatory taxation, they have a sovereign right to sales taxes on business conducted within their jurisdiction. The courts and the federal government can only step in when taxation is levied unfairly and unequally to different actors or businesses and therefore impedes interstate commerce.
All that noted, we do not expect this to be the final ruling by the Court, as retailers and states are likely to raise further challenges on other grounds.
Neil Saunders is managing director of research firm GlobalData Retail.