Ecommerce Just Lost Its Competitive Advantage
The recent Supreme Court ruling that enables states to tax customers of online retailers on their transactions takes the sheen away from www.tradezero.co ecommerce.
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In investing and stock trading, you need to realize that among the various factors influencing markets, court rulings are very influential. The ecommerce industry could be in for a shake-up with the Supreme Court going against the position it historically maintained in saving online retailers from paying sales tax for most transactions.
Online Retailers Were Historically Spared from Taxing Though brick-and-mortar retailers, and even state governments, had on multiple occasions objected to this privilege enjoyed by ecommerce businesses, the Supreme Court had been firm in its stance, till now. And, that could adversely affect the ecommerce industry, with its full impact not yet being realized. State governments have always been at odds with online retailers for the tax savings these ecommerce businesses enjoyed. An example is the Quill Corp. vs. North Dakota case where the tax commissions of North Dakota sought to force Quill Corp., the office-equipment business, to gather use tax from its customers residing in North Dakota. Quill countered the argument by stating that it didn’t have any offices, stores or even employees in the state. So, it really did not have to pay sales tax and use tax. Quill quoted an earlier case dating back to the 1960s where a retailer was freed from having to pay sales tax in a given state since it was only shipping products to customers there. Quill applied the same logic, leading the Supreme Court to rule in favor of the company.
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The Physical Presence Test Worked in Favor of Online Retailers The key argument in this case was based on the physical presence test, which stated that a state can impose use tax or sales tax requirements on the retailer only if they have a physical presence in the state in terms of store location, warehouse, office or employees in the state. That was a key point in that case, and in subsequent instances online retailers could avoid having to collect sales in whatever state they did business in, since they did not have a physical office. Only the state where the online business is incorporated would have the right to collect the sales tax from the business, on the basis that the corporate headquarters, which is located in the registered state, represents physical presence. In all the other states, even in places where they have a significant number of customers and more business, ecommerce businesses could avoid sales tax by structuring their business in such a way as to avoid any physical presence. They could conveniently avoid having a physical presence in states that have high sales tax.
Supreme Court Revisits Its Earlier Stance Then, something happened that caused the Supreme Court to reverse its decision. It was the case between Wayfair ($W), the furniture retailer, and the state of South Dakota. Here, the state government of South Dakota sought to enforce the state law on Wayfair, by which sales tax would be levied on www.tradezero.co
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online retailers having sales of over $100,000 or over 200 separate transactions to online shoppers from South Dakota. The state of South Dakota was determined to make Wayfair pay and convincingly presented its case before the Supreme Court, helped in no small part by the support extended by the National Retail Federation. The Federation held to the argument that different rules for traditional retailers and ecommerce businesses would give an unfair advantage to the latter. There were other groups that filed briefs supporting Wayfair too. Among these were taxpayer advocacy groups and rival e-commerce retailers. The Supreme Court, however, ruled in favor of South Dakota. It believed it should revisit the earlier decision it made in this matter, the Quill vs. North Dakota verdict, and overturned the earlier verdict. It stated that the physical presence test could not be considered sound or correct. Four of the justices dissented though, and they held that taxing online sales must be left to Congress lawmakers.
Online Retailers Bracing for Taxing Its Customers Shoppers at ecommerce giants such as Amazon ($AMZN) and eBay ($EBAY) as well as countless smaller online retailers would now need to set apart their money for sales taxes in addition to the product cost. That’s a big deterrent. States could force ecommerce businesses to collect sales taxes worth billions of dollars. That significantly cuts the advantage they had over their brick-and-mortar rivals.
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Though Amazon is large enough for collecting sales taxes in various states, which it did last year, the Supreme Court verdict still sent Amazon ($AMZN) shares falling 1.9% before the losses were pared. eBay shares fell 2.7%. Wayfair and Overstock ($OSTK) slipped 0.7% and 6.7% respectively, while Etsy ($ETSY) shares were off 2.4%. Walmart ($WMT) and Target ($TGT) could be giggling!
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