By Ben Conwell, Senior Managing Director and Practice Leader
Quite the riveting subject headline, right? Bear with me – this is a timely and important issue.
Because the US Supreme Court Said So
In the relatively young history of eCommerce, state sales tax collection laws on the books – or lack thereof – were a key driver of where pure-play online retailers, not the least of which is Amazon, chose to locate fulfillment centers (“FCs”). In recent years, the often cited 1992 US Supreme Court Quill decision became more of an issue for both traditional physical retailers and the upstart eCommerce players. Per Quill, if a retailer does not have a “physical presence” in a state (also known as ‘nexus’), it doesn’t have to collect and remit sales tax on sales to residents of that state.
Traditional physical retailers (“bricks and mortar”) have argued since the early days of eCommerce that the requirement to collect sales tax on in-store sales while online retailers with no “physical presence” under Quill do not, provides online retailers an unfair competitive advantage. Sound familiar?
Earlier this year, South Dakota filed suit against four large online retailers seeking to force them to comply with a state law passed in March that requires – in clear conflict with Quill – collection and remittance of sales tax on sales to residents, even though the retailers have no physical presence in the state. The suit against Wayfair, Newegg, Overstock and Systemax acknowledges that it requires abrogation of Quill.
There is a considerable amount of tax revenue in question, but South Dakota’s prospects of success are about nil.
Each State is Different
Fast forward to 2010 when Amazon began to aggressively ramp-up locating build-to-suit FCs. Amazon’s corporate structure qualified it to not have to collect sales tax under Quill in a number of states where it operated subsidiaries. Other states had laws on the books or were likely to pass laws that could result in requiring collection.
Locating FCs only in states with either no sales tax or with acceptable laws was limiting the company’s expansion. To keep up with demands to make two day delivery feasible to more customers, Amazon began to reach agreements with individual states. These agreements often included a deferment of tax collection of 12-24 months in return for the investment, job creation and future sales tax revenue that would flow to states and local jurisdictions.
As the market leader and aggressively expanding to bring more selection closer to more customers with shorter delivery distances, Amazon was the most active online player pursuing this strategy. Smaller pure-play retailers can operate longer in fewer states before they face similar pressures.
Marketplace Fairness Act
Amazon and select pure play online retailers advocated hard for a national sales tax collection law that would smooth out state-by-state differences. The Marketplace Fairness Act (“MFA”) was intended to even the playing field for physical and larger online retailers. The bill had a revenue threshold beneath which small retailers didn’t have to collect sales tax.
The then-democratic controlled Senate eventually passed the MFA bill, but it proved to be dead on arrival in the House, where it technically still sits today. And where it will most likely stay unless congressional majorities change markedly in November.
One of the ironies to the House majority’s objection was that it was couched as new taxes being levied on online shopper constituents. Technically, in most states we’ve already been obligated to track our online purchases for which sales tax was not collected under Quill and remit the obligations ourselves. MFA would not be a new tax. It would’ve confirmed the obligation of taxes that everyone has supposed to be paying already. Quill didn’t say residents have to pay sales tax on purchases made online – rather it pertained only to the sellers’ obligation to collect the tax that was owed and remit it to the state.
Tax Payer Confession Time
The group of us who every year dutifully paid our state’s self-computed and self-reported sales tax obligation on online purchases prior to retailers having a qualifying physical presence in our states can dance on the head of a pin. Since I live in Amazon’s home state, I have always had sales tax collected on my Amazon purchases. There is no dodging the definition of a “physical presence” for AMZN in this state.
Effect on Site Selection
In spite of huge changes in the online and physical retail landscape in recent years, there are still significant numbers of eCommerce retailers out there – pure-plays or nearly pure-plays – that are not obligated to collect sales tax in all states. Assuming Quill is not overturned or that MFA is not made law, many online retailers will continue to weigh the impact of locating a facility in a state where sales tax is collected on online orders from residents or not.
Labor availability and sustainability – check. Proximity to customers – check. Transportation costs – check. Energy costs – check. Occupancy costs – check. The existence – and nature – of collection laws, plus the expected elasticity of customer demand of having to collect tax all need to be underwritten in the site selection process. How does the impact of having to collect sales tax in a state compare to being that much closer to significant target population density? Every search is different.
Shift of Pure-Play eCommerce Towards a Hybrid Model
Increasing numbers of former pure-play eCommerce retailers are capitalizing on the powerful effect of launching a limited physical presence to complement their digital offerings. Amazon’s bookstore strategy is the highest profile example of this trend. Its broad existing network of states where it collects tax means Amazon’s retail expansion should trigger no incremental nexus. Retailers such as Bonobos, Warby Parker, Nasty Gal, Blue Nile, Casper and Proper Cloth represent the growing collection of online players opening storefronts in select, mostly urban areas. Arcane subsidiary structures notwithstanding, such storefront openings often create nexus and trigger tax collection on online sales to in-state residents, perhaps for the first time for such retailers.
Unfair Pricing Disadvantage?
Online purchases from Macy’s, Target, Walmart, Crate & Barrel, Best Buy and Bed Bath and Beyond, for instance, will all probably entail sales tax collection by virtue of their extensive store networks. Is it an unfair disadvantage for retailers that have physical locations in practically every state to have to collect tax on both online and in-store sales while many pure-play online retailers do not?
Physical store retailers have pleaded that for years. Yes, a 5-9+% price difference – all others things equal – can help drive the buy decision. Sure it is a factor, but it is only one of many. The ease of the shopping experience, the trust in the delivery dates, the quality of the customer service, the nature of the returns offering, green factors, cost of shipping, speed etc. all figure in the customer’s buy decision too.
Try and resist the urge to tune out the next time clients discuss sales tax collection laws in different states. It continues to be an important factor in site selection for new facilities.
Ben is Senior Managing Director and Practice Leader for Cushman & Wakefield’s eCommerce and Electronic Fulfillment Specialty Practice Group for the Americas. His responsibilities include counsel on strategy, site selection, design and execution for leading retail and logistics occupiers and investors, intellectual property presentation and business development. As leader of the Special Practice Group, Ben provides Cushman & Wakefield clients the most up to date market-leading counsel to effectively plan and execute their supply chain and fulfillment and real estate strategies.