Since 1992, avoiding sales tax was a perk of online shopping. In June, the Supreme Court changed the landscape of online shopping in a 5-4 ruling allowing state governments to oblige retailers beyond their borders to collect sales-tax revenue from consumers in an effort to level the playing field between online and brick-and-mortar retailers.
To better understand this decision and what it could mean for our industry, we invited John Simonson, founder of digital marketing firm Webstream Dynamics, and Steve Simonson, founder of online flooring retailer iFloor, to talk about this development. Following are excerpts from this conversation, which can be heard in its entirety at floortrendsmag.com by clicking on podcasts.
TF: What’s your take on this recent ruling?
John Simonson: The idea of leveling the playing field is something that the flooring industry has advocated for a long time. Many of the dot-coms I have worked with have advertised the fact that consumers can save the sales tax by doing business with them. I remember, back in 1998, when one of my ecommerce clients received an order from an installer in Texas who wanted to buy hardwood flooring and save the sales tax of 8%—which went a long way to offset the shipping cost. Yes, there are times that this ruling will help level the playing field for flooring and other major purchases, but not so for small packaged items.
Steve Simonson: I’ll take the opposing view that this was a terrible ruling by justices who don’t fully understand the situation. In fairness to the Supreme Court, they looked at it and said, “Wayfair, you are a multibillion-dollar company. You have no excuse to say that physical presence is required or is some type of so-called bright line to determine whether you should comply with South Dakota law.”
The court went out of its way, in my opinion and the opinion of many experts, to suggest that a multibillion-dollar company that really has the wherewithal to comply with state laws regardless of this bright-line law—the bright-line law was noted in the Quill vs. North Dakota decision of 1992, which essentially says that without a physical presence, one should not be expected to carry on business. The court, with this decision, just removed the bright-line, saying that no longer is physical presence the yes-or-no binary on/off switch. It said we’re going to something called the economic nexus. This is where the wheels come off for me. I’m fine with multibillion-dollar companies being held to a standard, but the challenge for small companies trying to cope with laws across 45 states that charge sales taxes is unrealistic in many ways.
Let me give you an example: the law that South Dakota proposed—and was essentially permitted by the Supreme Court—sets the threshold for charging tax at $100,000 worth of transactions in their state or 200 transactions annually. This is crazy because the average Amazon seller sells a $25 item, so $5,000 worth of products could now require a small seller to comply with this judgment. I’m outraged by it.
John Simonson: I would like to add to what Steve said. There is software out there that is going to have to get a lot better at policing this. But the question is, how do you know, as an ecommerce retailer—or anybody selling online, whether they are with eBay, a third-party Amazon or an independent online retailer—how can they know at the beginning of the year if they are going to do 200 transactions? By the end of the year, if they have done 200 transactions, it’s impossible to go back and charge the tax. Just prior to the Supreme Court ruling, Iowa and Illinois passed laws similar to the one in South Dakota, calling for $100,000 or 200 transactions as the threshold for charging tax.
TF: How does it change your opinion if Congress writes new legislation to address these issues?
Steve Simonson: The 1992 case, Quill vs. North Dakota, was primarily a mail order case. What the court said in that case was, “You are sending these packages by common carrier. The seller is not in that state, they are not utilizing the resources of the receiving state, so why should they be responsible?” In hindsight, the court telegraphed ahead of the decision that they might look at it differently with the internet growing into what it has become.
Headed our way is an avalanche of regulation and paperwork as ecommerce online sellers, and John is right—the software packages out there need to improve. In my view, however, the state of South Dakota was 100% disingenuous in their argument, and I read all of the oral arguments made before the court, and they more or less, in my opinion, misrepresented the fact that the tax programs for $29 per month, per state, just handle it. It is not that simple. It does not take into consideration the fact that once you have sales tax nexus, then you have income tax nexus, which none of the existing software programs deal with. It also doesn’t take into consideration all of the cities and counties and government bodies that will try to get in on this newfound source of revenue, which is the ultimate of taxation without representation. It is my hope—and let me add that I am not holding my breath—that Congress will step in and set a uniform rule.
TF: How will online sales be affected for flooring and other big-ticket items?
John Simonson: A great deal of the customers of the online floor covering sellers that I work with call with the idea of saving the tax. That tax is huge if the sale totals out at $5,000 to $10,000 and the customer happens to be in a state with an 8% sales tax. It helps mitigate the cost to ship the goods, which is costly. For online floor covering retailers, it would be a double hit. There will be two additional costs that they don’t have now that will definitely affect how flooring will be sold online. First, it would be the sales tax itself, and then the cost of the additional paperwork—the administration costs for all of these states.
TF: How do you see this ruling affecting business that have online and brick-and-mortar stores?
John Simonson: Every online retailer client I have is a brick-and-mortar retailer who decided at some point to expand into doing business online. These retailers are very unsure about the future and what is going to happen because they are waiting to see what the various states are going to do. At present, South Dakota, Illinois and Iowa have applied the $100,000 or 200-transaction threshold to pay state taxes. But all of these retailers are very tentative about the future
TF: Has Congress talked about this situation and done nothing about it?
Steve Simonson: Often the headlines have been about keeping the internet free, and that was more about taxing internet connections than about taxing sales. Congress has largely dodged this issue and is missing the important point that this will impact not just big interstate sellers, and it is already impacting marketplace sellers on Amazon. I’m seeing hundreds of sellers across the country being beaten down by mafia-like enforcement agencies in New York, California and Washington. It’s egregious, and politicians just let it happen.
TF: The ruling implied that software would soon be developed to make tax collection relatively easy?
Steve Simonson: South Dakota argued that all a company had to do was pay $29 a month to TaxJar, a software company, and you’re done. That is the farthest thing from the truth. There is a cost per state to use programs like TaxJar or Avalara [another online tax solution]. Also, it does nothing about the state income tax. Imagine an online seller selling across the country now has to figure how to cut their revenue by all the states that want a little piece of it. I have a friend that registered in Arizona as an Amazon marketplace seller, and she was collecting sales taxes on a $15 order. One day, she received a note from Tempe, Ariz., asking for their $50 per year registration. My concern is the unintended consequences—the avalanche from thousands of jurisdictions and taxing agencies who spot out-of-town players who don’t get a vote in their local elections.
TF: How is this going to impact brick-and-mortar retailers?
John Simonson: My feeling for retailers in this business is that there are many other things that they need to address, such as omni-channel marketing, getting in front of their customers, engaging their customers online, and not worrying about sales taxes. There are much larger issues that they have to overcome when it comes to dealing with the internet for a company to be successful in this mobile-friendly environment. And many of these independent retailers are losing to the likes of Amazon.
Steve Simonson: I agree with John. This will be a big, fat nothing. The internet is where the customers are. They can celebrate the potentially hollow sales tax victory, which will surely be back in court, that will probably have some delineation between the big guys and the little guys. I don’t think brick-and-mortar retailers will get to enjoy any particular windfall, and they should heed John’s point that whatever way the internet is important to them, they should engage it because the sales tax is not going to save them.