For years, online retailers have enjoyed a competitive advantage over brick & mortar industries by promising lower rates to consumers while delivering products at their doorsteps. The Supreme Court has put a kink in the armor of the online e-commerce bonanza. Physical stores and state governments attribute these lower rates to the e-commerce industry being potentially tax-free. The advantage that the online marketplace has over the brick and mortar retailers has cost the local economy in each state millions of dollars due to lower sales and tax revenues.
All that may change with a recent ruling by the supreme court which overturns the system that was introduced more than a decade ago and that had allowed online retailers to sell their products without charging sales tax to their consumers.
How the new law affects the e-commerce industry
Soon after the supreme court announced the ruling, Amazon’s share price went down by 1.1% while Overstock.com, which is a leading online seller of branded home décor products, lost 7% on the stock market share value. This suggests a strong sentiment from consumers about the new ruling. Companies suggest that the tax-free online marketplace helped shape the American economy in many ways.
Many manufacturers preferred selling their products online due to wider access to consumers all over the country. Small Businesses could auction their products on Amazon and eBay rather than establishing their online retail outlets. Last year online sales exceeded half a trillion dollars helping consumers of all age groups and financial brackets to enhance their lifestyle in different ways. The new law will change how customers shop online and have long-lasting effects on this industry.
How the tax law affects the entrepreneurial spirit
Major players in the online market such as eBay and Amazon have raised concerns about how the new law will affect the entrepreneur community. Small Businesses have used e-commerce platforms to market their creative products for many years now. With a tax-free online platform, entrepreneurs and technology startups didn’t have to worry about distribution centers and primarily focused on their product offering. The latest ruling from the supreme court will eventually make it difficult for small business owners to distribute their products nationwide due to complex tax calculations and lower profit margins should the not change their pricing model.
Complying with multiple tax jurisdictions
Applying tax on each product distributed online is a challenge itself as there are more than 10,000 state jurisdictions that govern sales taxes across the country. Although supreme court has indicated that there are tax calculation tools that are available in the market to solve this problem; it is still a logistic issue that needs attention before the ruling gets implemented across the whole industry. The big players in online space suggest that Congress needs to be involved in handling this matter more effectively.
Changing the online shopping trend
In the last decade or so, consumers have enjoyed a variety of benefits for online shopping. It has made easy for them to compare market prices and gain access to manufactures from all over the country. Almost 90% of the consumer base in the United States has access to the internet. With each state implementing a tax on online products, the consumer will be encouraged to shop locally. Although this will boost sales for bricks and mortar industry, it may have adverse effects on economic growth as businesses would shrink to cater to local population only.
Disruption in the brick and mortar industry
The supreme court’s ruling on South Dakota v. Wayfair Inc. will provide a level playing field for e-commerce and brick and mortar industry. However, the increase or decrease in sales will depend on each sectors pricing and promotion tactics. In parts of the country such as New York and California where online giants such as Amazon and e-bay already have a physical presence, the buying trend may not change much. With minimal or no tax subsidies available on the online marketplace, a new business may start partnering with local chains such as Walmart, Target and Best Buy to market and distribute their products to their target consumers.
How individual states can benefit from this ruling
State governments have a complaint about losing billions of dollars in taxes because local people prefer to shop online rather than in local stores. Once the supreme court ruling implements, each state will be allowed to introduce laws to charge a certain percentage of sales tax on e-commerce transactions. This will help them in acquiring more tax money and eventually contribute towards the welfare of the local community.
Dissent from the legal community
Some of the senior lawmakers have raised concerns about the supreme court’s ruling on the matter. They suggest that any alteration to rules that can disrupt such a critical part of United States economy should be for Congress’ undertaking. The law that allowed e-commerce industry to sell products tax-free came about in 1992. In the past 15 years, the industry has grown exponentially, and all over the country. Therefore, such a change needs to be introduced by a national governing body to ensure nationwide standards.
Concerns over the impact on the small business sector also must be considered. As a statement from Ebay reminds us:
“As expressed in both the Supreme Court’s decision and throughout oral arguments, the operations of small businesses are different than large retailers and state tax actions targeting them raise additional legal questions that are not addressed by this decision,” eBay wrote in a statement. “Now is the time for Congress to step in and provide clear tax rules, with a strong small business exemption, to help small businesses take advantage of the Internet to grow and create local jobs.”
This sentiment was also expressed from Etsy and other online arts-and-crafts sites.
Supreme court’s ruling to introduce taxes in the e-commerce industry will provide a level playing field for all retailers to compete with the same tax rules. Online retailers will need to devise new strategies to attract consumers and maintain their online sales trends. This is also an opportunity for Congress to pass legislation that will help in creating uniformity and clarity for implementing this rule across the country.