Supreme Court Sales Tax Decision Levels Playing Field for Retailers
On June 21, 2018, the Supreme Court overruled the physical presence standard set forth in the 1992 Supreme Court sales tax decision, Quill Corp. vs. North Dakota. The Quill decision provided that online retailers without a physical presence in a state are not required to collect state and local sales tax on sales to customers located in that state. In South Dakota v. Wayfair, Inc., the Court argued the physical presence rule had become outdated and was creating a negative impact on the local retail market.
Retailers started moving away from physical locations towards online sales for three main reasons. Firstly, e-commerce offers the simplicity of offering more selections for sale to customers. Secondly, retailers can capture the “comfortable shoppers” who love to shop from their couch in the comfort of their own home. Lastly, online retailers had a price advantage over local retailers because online consumers were able to purchase items cheaper, in part because the online retailer was not required to collect state and local sales tax.
So how does this ruling affect owners of retail space? If retailers are moving away from brick-and-mortar stores and moving towards the online sales market, it will in turn affect the demand for physical space. Now that the Supreme Court Decision has overturned the Quill ruling, owners of retail space may benefit once again! Customers will likely now have to pay sales tax regardless of whether the purchase is made online or in a physical store. It effectively levels the playing field. It remains to be seen what thresholds (e.g. sales or transaction volume) under economic nexus standards states will implement to exempt or subject merchants to sales tax.
The other main beneficiaries of this court decision are state and local governments. There was an estimated thirty-four billion dollars per year of uncollected sales and use tax on online purchases. The Supreme Court decision in Wayfair will require more online retailers to collect state and local sales tax which will provide additional funds to state and local governments.
As beneficial as this may sound for some, there are various parties that may be negatively affected by this outcome. For instance, public stock holders of online retailers may see stock prices decrease due to this ruling. Online customers will now have to pay sales tax regardless of the fact that they are making their purchases online. However, this may not hurt the online retailers as much as it will benefit the local retailers and real estate owners.
For questions or more information, contact Rebecca or a member of our Real Estate Group by filling out the form below.
|Rebecca Machinga, CPA, CGMA, Practice Leader of the Real Estate Services Group
(609) 520 1188