Brick-and-mortar retailers welcomed the June 21 Supreme Court decision that allows states to collect sales tax on internet purchases. But will that really prompt shoppers to buy more in local stores and less online?
"No," said Purdue University Professor Richard Feinberg. "Amazon has been collecting sales tax for quite a while now and it hasn't had any negative impact on their sales. People are not making a decision about whether to buy online because of any sales tax on the goods. It's all about convenience and selection and it's just not a big issue."
If anything, traditional retailers will have one fewer excuse to blame for their problems. “They have, in some ways, been hiding behind excuses like a tax differential,” Edward Yruma, an analyst for KeyBanc Capital Markets, told Bloomberg News. “What’s driving the success of online players is this is how the consumer wants to shop today. It’s that simple.”
States were already collecting about 75 percent of the potential taxes from online purchases, according to the Government Accountability Office. The portion not being taxed could total as much as $13 billion a year.
Many large online retailers already were collecting sales tax in states where they have a physical presence as a result of a 1992 court ruling.
Indiana's sales tax rate is 7 percent. Statewide, collections in 2017 totaled $6,965,369,619.
Amazon collects state taxes on its online sales. But taxes on sales from its online marketplace, where third parties offer goods, are collected at the seller’s discretion. These sales account for about half of the online giant’s retail revenue. A handful of states already have laws requiring marketplace participants to collect state levies.
If the new state sales tax requirement does end up hurting some of the marketplace sellers, that may actually help Amazon, according to retail analysts at Loop Capital Markets. The company could benefit by selling more of those items directly, which would boost its revenue because Amazon would receive the full price of the transaction instead of just a commission, the research firm said in a note.
The Indiana Chamber of Commerce applauded the decision. “It will further level the playing field between in-state brick-and-mortar retailers and their online competitors, while also boosting Indiana’s sales tax base," said Bill Waltz, vice president of taxation and public finance. "For years, this situation has resulted in substantial loss of revenue to states, thus increasing the tax burden on those who do pay the taxes they owe."
Brick-and-mortar stores have always been on a level playing field, Feinberg countered, "except that they don't know what they're doing in terms of online shopping. Most of our local retailers in Fort Wayne and Lafayette just don't understand how to do online sales, so they just fall further and further behind Amazon. That doesn't mean that all hope is lost for local retailers, but it has nothing to do with sales taxes."
Online sellers have argued against the sales tax, in the past, in part because it varies from state to state and sometimes even within a state and it makes the collection too complicated. But Feinberg believes that really isn't an issue anymore, because computers have made the calculations so easy. And shoppers themselves don't pay attention to how much sales tax is collected on their purchases. "That kind of mental accounting just doesn't happen."
What does have an impact on online sales is free shipping, Feinberg continued. Consumers expect it, and if they don't get it from one retailer they will go to another who does.
Online retail sales grew 14.7 percent during the 2017 holiday retail season, reaching a record $108.2 billion, according to an Adobe Analytics report. Overall holiday sales during November and December increased 5.5 percent over the same period in 2016 to $691.9 billion on the strength of the economy.
Amazon.com, where about 50 percent of consumers visit first, remains the go-to site for online and in-store shoppers, Feinberg noted in his 2017 holiday forecast. It accounts for 10 to 12 percent of all holiday spending, and information on Amazon influences what consumers expect to find in stores and influences the stores they choose.
A large portion of consumers — about 75 percent according to a Purdue study — search on Google for businesses or products, a statistic that cuts across all ages and demographics, Feinberg said. Local businesses should have search engine optimization in place and ensure their profiles — hours and location — are updated as consumers will often use the Google search result information instead of actually visiting a store’s website.
The trend toward online shopping also means businesses need to adapt their marketing techniques and remain updated on all online platforms. Pinterest is particularly influential, Feinberg said, noting customers look for ideas they like on that platform and will then find where to buy those items. Retailers typically put out weekly ads, but Feinberg stressed the importance of all business — small or large — to update the company’s website with the latest sales and promotions.
The June 21 decision could create more legal questions, since states may begin passing their own statutes with the goal of raising revenue from online retailers, according to Bruce Ely, a tax attorney at Bradley Arant Boult Cummings LLP. Some may even try to collect levies from previous years, he said.
The ruling may also finally spur Congress to pass a law setting a federal standard for which companies have to collect the tax. The statute in South Dakota, which the court upheld, requires collection for retailers with more than $100,000 in annual sales.
Bills trying to address this matter have languished in Congress for years. The main issue is that elected officials didn’t want to be seen as administering a new tax on consumers or businesses. But now, they can act in the interest of bringing clarity to the marketplace, Ely said.
“Here’s a perfect time for Congress to save the business community from the big, bad taxing authorities,” Ely said. “They can look like the good guy, rather than the bad guy, which has a certain political appeal to it.”