Brick and mortar retail businesses have been experiencing financial distress, with retail defaults at an all time high. In 2018 alone, there have been over a dozen retailers filing for bankruptcy protection, several of which, including Toys “R” Us and The Bon-Ton Stores, have been forced to liquidate. However, while many traditional “mall tenants” and other brick and mortar retailers have been struggling, online retailers have been flourishing. The convenience and speed of online retail, coupled with ongoing advances in technology and delivery distribution capabilities, have led to a consistent increase in e-commerce customers. Further fueling the divide between e-commerce retail success and brick and mortar retail failure has been the different tax obligations imposed against each group. Specifically, brick and mortar retailers are required to collect and remit sales tax, which currently exists in 41 states, while online retailers have largely been exempt from this requirement. In today’s highly competitive market, this taxing requirement has placed traditional retailers at a significant pricing disadvantage compared to e-commerce retailers.
This tax treatment disparity, however, is about to end, as the Supreme Court in South Dakota v. Wayfair recently held that online retailers would be required to collect and remit state-imposed sales tax. In reaching this decision, the Supreme Court overruled its prior decisions in National Bellas Hess, Inc. v. Department of Revenue of Illinois and Quill Corp. v. North Dakota, where the court had held that a state may not require a business that has no “physical presence” in the state to collect its sales tax. The Bellas Hess and Quill decisions were based largely over concerns about the complexity of collecting sales tax, and the burden that imposing collection on out-of-state sellers would have on interstate commerce.
Delivering the opinion of the Supreme Court in Wayfair, Justice Kennedy concluded that South Dakota’s recently enacted tax law, requiring out-of-state retailers to collect and remit sales tax “as if the seller had a physical presence in the state” when, on an annual basis, a retailer delivers more than $100,000 of goods or services or engages in 200 or more separate transactions for delivery into the state, was permitted under the Commerce Clause. In overruling its prior precedent, the Supreme Court considered the reality of today’s e-commerce market place and essentially held that its prior analysis, particularly concerning the burdens on interstate commerce, was outdated and ignored the substantial “virtual” connections online retailers have to states. In particular, the Supreme Court found that Quill creates rather than resolves market distortions, resulting in “a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers.”
The Wayfair decision has already resulted in legislators from almost every state making inquiries about what changes need to be made to their respective state tax laws in order to be able to collect tax on internet purchases. It is clear that most, if not all states, will soon follow South Dakota’s lead, thereby generating significant revenues from online sales. In addition to states and municipalities, Wayfair is a huge win for brick and mortar businesses, which can now compete price-wise with online retailers. Wayfair may not end brick and mortar retail failures, but it is a bright light in what has been an otherwise dark period for traditional retailers. The playing field is at least now level from a pricing perspective. Time will tell if the brick and mortar business model is just obsolete or if a comeback “is in store.”