If you sit on the Supreme Court bench long enough, you might be given the opportunity to overturn a ruling you later come to regret. In deciding the case of South Dakota v. Wayfair, Justice Anthony Kennedy had a chance to do just that—and he took it.
In 1992, Justice Kennedy was part of the 8 to 1 majority that ruled in the landmark case of Quill Corporation v. North Dakota. The case was about the collection of a “use tax” and whether an out-of-state company with sales—but no physical presence—in the state was required to collect it.
The Supreme Court ruled in favor of Quill, an office supply catalog, determining that since the company didn’t have outlets or sales representatives in North Dakota, the state could not require it to pay a use tax on the products it sold to customers there.
The court’s ruling would become the legal foundation that gave internet companies a free pass when it came to the collection of sales tax in any state where they had no office or warehouse. Brick-and-mortar retailers came to refer to this as the 8 percent advantage. Eight percent was the average sales tax rate around the country that retail stores were required to collect, but internet companies were not.
In recent years, Justice Kennedy has suggested, through various opinions and statements on the subject, that he had come to realize that the courts basically created a tax loophole for online companies, and that the court ruling was costing states billions in lost tax revenue.
South Dakota estimated that it was losing between $48 to $58 million a year in revenue due to online shopping, so it came up with a solution. It began collecting sales tax from any company with 200 or more transactions in the state each year or with more than $100,000 in sales.
Wayfair was one such company, but it objected to being forced to collect sales tax in the state. South Dakota sued the company and eventually took its case to the Supreme Court.
Last week, the court ruled in South Dakota’s favor. Justice Kennedy wrote the 5 to 4 majority decision. He had strong words for Wayfair: “Wayfair offers to sell a vast selection of furnishings. Its advertising seeks to create an image of beautiful, peaceful homes, but it also says that ‘one of the best things about buying through Wayfair is that we do not have to charge sales tax.’”
“What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments,” Justice Kennedy’s opinion states. “State taxes fund the police and fire departments that protect the homes containing their customers’ furniture and ensure goods are safely delivered; maintain the public roads and municipal services that allow communication with and access to customers; support the sound local banking institutions to support credit transactions [and] courts to ensure collection of the purchase price.”
Even the four justices who dissented, led by Chief Justice John Roberts, agreed that the “physical presence” rule has long since been outdated. But they weren’t convinced that the courts were the place to ultimately decide this matter. Many on the bench and elsewhere were hoping Congress would step in and draft clear legislation that would put national guidelines in place.
Wayfair released a statement: “We welcome the additional clarity provided by the court’s decision today. Wayfair already collects and remits sales tax on approximately 80 percent of our orders in the U.S., a number that continues to grow as we expand our logistics footprint. As a result, we do not expect today’s decision to have any noticeable impact on our business, as it may on other retailers who do not currently collect and remit sales tax.”
The court’s ruling comes at a time when traditional retailers have been on the comeback trail. Shares of RH and Williams Sonoma have been breaking out to new 52-week highs recently, and even shopping-mall operators like Simon Property Group have been showing signs of life again. Forrester Research suggests that at least 10 percent of shoppers would return to shopping at their local stores if sales tax were no longer an online shopping advantage. Retailers look forward to welcoming them back.
Dennis Scully is the host of the weekly BOH podcast, where he explores the changes and challenges facing the interior design community through interviews with industry thought leaders, entrepreneurs and creatives. He is also the vice president of sales and marketing at luxury textiles company Castel. Scully was previously a business development consultant for major trade brands, and has held sales and marketing roles at Domino, Waterworks and Twill Textiles. In his Market Watch columns, Scully calls upon his background as an analyst and long-time securities trader as he explores the ins and outs of the home industry’s publicly traded businesses.
Disclaimer: The author does not hold shares of the companies featured in this column at the time of the story’s publication. The views, thoughts and opinions expressed here belong solely to the author, and do not necessarily reflect those of BOH. The material is for informational purposes only, and does not constitute any form of financial advice.