How SCOTUS Sales Tax Ruling Will Hurt Small Retailers

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I was having drinks with a friend who is in a fairly large band a few years ago. Since my days as a touring musician never produced a net profit, the way taxes are structured for performers never occurred to me. They had to produce a return each year for every municipality in which they played a show. Not just state but local. It changes the way a band structures it’s tours and building of a fanbase. If your fees to file a tax return in Ann Arbor end up being $500 and your band is netting $4,000 on a show there, you’re probably going to hit Ann Arbor twice in a year as opposed to hitting another city nearby.

Today’s Supreme Court ruling, overturning Quill, allowing states to collect sales tax from online sales is an enormous gift to the largest retailers and might make ecom for smaller merchants impossible. I’ve written before about how many independent retailers lack knowledge of the scale it takes to truly be successful online. A $1m online business and a $100k online business likely have similar software and operating expenses.

Amazon needing to file 45 state returns (5 states do not have sales tax) or exponentially more if this ruling requires online retailers to file local taxes as well is likely not something they will celebrate, but it’s not enough of a burden to make them rethink their business. Think about King Kong and Curious George running hurdles against each other and a slightly larger than normal hurdle ends up on the track. George might find it impassable while Kong may acknowledge it while he keeps running at the same pace.

If you’re a strictly brick and mortar merchant celebrating this decision because you think it removes the advantage from your biggest online competitors, think again. The idea that negligible discounts have been why ecom has been gaining market share is a total misread of the situation. Always and forever the business that provides more convenience and a better experience will win. Price factors in as an element of those, rather than a reason in its own right.

Assuming no serious protections for small business are introduced, here is what I expect to happen:

  1. Huge growth for tax software. Companies like Avalara will win big. You’ve had to be a certain size for simplifying tax collection to really be a very compelling pitch until now.
  2. Shopify (and similar) will offer solutions. You’re looking at another, and probably your most expensive, app. It will be something like Bench meets Avalara.
  3. Even more growth in marketplaces + changes in nature of those relationships. Amazon, Etsy and other marketplaces will change the structure of their agreements so sellers on these channels will be their vendors/distributors rather than independent businesses. By Levi’s selling to Amazon rather than selling through Amazon, Amazon will assume the responsibility for the tax collection. For smaller sellers this will end up being a huge service they’ll be willing to shed another percent or so of margin for.
  4. Loopholes will be exploited. I know $100,000 is being kicked around as the level at which businesses can afford the burden. If such a threshold is introduced, I believe it will rise significantly. Businesses will just form multiple LLC’s to get around the rules. This will lead to something like mini-marketplaces where a single company’s shirting brand and jeans brand sell in a central location that is it’s own entity.
  5. More growth in local online. This one is kind of a wash that may actually give a bit of a leg up to small online retailers. There will likely be a lot of small companies that begin to only ship in state. So little company A in Ohio and little company B Washington will just be shipping to their local customers instead of inefficiently shipping across the country. As most online retailers don’t really have the right formula to be a billion dollar brand, this bit of forced discipline might make them realize there is actually more than enough business to be had in their home state to make their venture worthwhile.

I wouldn’t actually disagree with this ruling if it didn’t take into account the industry that has been allowed to take root in it’s absence. It’s honestly hard to find a good argument why the same person can buy the same product in the same city and be forced to pay an additional 8% for having to drive somewhere, paying to park and buying it in person as opposed to clicking a button on a phone and having it show up in two days. However Quill allowed an entire sector to be framed around it’s understanding of the law as decided by the Supreme Court.

It’s too early to tell what this will actually mean for independent retail online, but I would (and will) start focusing even more on local and regional business. If you aren’t intentionally scaling a national brand already, your need to ship nationally (or beyond) is likely preventing you from seeing bigger profits and doing a better job serving your local audience anyway.

 

 

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