The Supreme Court’s Online Sales Tax Decision: A Welcome Boost of Fairness for Physical Retailers – But No Panacea for the Ailing Sector

by | 27 June 2018

In a decision long sought by the nation’s shopping centers and local governments, the U.S. Supreme Court ruled last week that states and municipalities can require online retailers to collect sales taxes on e-commerce transactions in their jurisdiction – even when the retailer has no physical presence in the area, effectively overturning a pre-internet Supreme Court ruling regarding cataloge sales.

Representatives of the physical retail real estate sector rejoiced, as the decision will help level the playing field. After all, it’s only fair that physical retailers should not be disadvantaged relative to their online competitors, who were able to offer tax-free shopping. Local governments also will be pleased over the potential to recapture billions of dollars in lost sales tax revenue.

But while physical retailers surely will benefit from this decision, it’s not clear that this ruling alone will do much to boost the beleaguered conditions of shopping centers today. First, the online sales tax holiday is only a relatively minor factor in most consumers’ shopping decisions. Surveys by comScore show that sales taxes are the primary consideration for only 10% of online sales. Rather, free shipping (54%) and the availability of exclusive online deals (23%) are far more important.

Moreover, most consumers no longer enjoy the online sales tax holiday anymore anyway. Amazon – by far the dominant e-commerce retailer, with more online U.S. sales than the next nine such retailers combined, according to ecommerceDB.com – already collects sales taxes on products it sells directly in all 45 states (plus Puerto Rico and the District of Columbia) that have sales taxes (though not always on goods it sells on behalf of affiliates). Other leading retailers have followed suit, so as a practical matter, most consumers are already paying the tax. Thus, investors surely overreacted to the news in beating down the share prices of leading e-commerce players last week.

But perhaps the most significant reason that this sales tax ruling will not be a cure-all is that e-commerce itself is not responsible for all of the problems ailing our nation’s malls and shopping centers. Online sales still account for only 10% of non-auto retail sales, rising to 20% or more if we exclude the retail categories that typically are not sold online: groceries, home improvement, small convenience items and of course, prepared foods.

The diversion of these sales from physical to online retailers undoubtedly has hurt brick and mortar retailers. But physical retailers and shopping centers are facing a host of other challenges that are forcing a fundamental reckoning. These include:

  • Changing demographics as boomers retire, altering both the composition and quantity of retail goods sold.
  • Consumer spending has shifted away from goods and toward services that are less likely to be transacted in retail space or shopping centers.
  • Significant reductions in store counts in the aftermath of the dramatic overexpansion in retail space over the two decades preceding the recession.
  • The need for more exciting concepts to attract and engage consumers.

None of this portends the end of physical retailing. The one constant in retailing is change and reinvention, and the retailers and shopping centers today that have transformed themselves to stay aligned with the changing landscape are doing better now than ever and have a very bright future. Moreover, there’s reason to believe that some of the worst pain is behind us as industry players adapt to the new market and consumer realities.

But that doesn’t mean retailers can now rest. Hardly. Retail sales will not swing strongly back to physical retailers just because sales taxes will now be universal online.

Fairer to physical retailers? Sure. But a game changer? No way.

Andrew is the U.S. Chief Economist for Colliers International, where he provides thought leadership about commercial real estate, capital markets, financial investment and related sectors. He’s held a variety of leadership roles in both the public and private sectors.