The US Supreme Court issued a decision in 2018 on a case titled SOUTH DAKOTA v. WAYFAIR INC., ET AL. that centered on States’ authority to require out-of-state sellers to collect State taxes. Taxation increases costs, and costs impact supply chain decisions. But to be clear, the Wayfair case did not focus on the States’ authority to tax. Rather, the focus was on the authority to require sellers to collect the state taxes. Of course, if a seller does not collect the state tax, then the responsibility falls on the consumer to pay it to the state. And consumer compliance rates in this situation are historically low (surprising?). Many e-commerce companies got around the requirement to collect state taxes due to a lack of a physical presence in certain states. Amazon, until a few years ago, placed a great deal of emphasis on state taxation when determining where to locate its distribution centers. Fast forward to today, many large e-commerce retailers such as Amazon voluntarily collect state taxes. However, many others do not. The recent decision by the US Supreme Court provided States with greater authority to make State tax collection a requirement of retailers.
I believe that this could cause an inefficient “tax wedge” and create an administrative burden on small retailers. But I also believe this will contribute to a fairer competitive environment and facilitate greater fulfillment responsiveness for online orders, especially in less populated states. Why greater responsiveness?
Location, Location, Location
Although large e-commerce retailers like Amazon have substantially reduced their focus on state tax burdens, I assume smaller companies have continued to consider their lack of requirement to collect a state tax as an advantage. Furthermore, this advantage was likely great enough in some cases for them to refrain from setting up a physical presence in the given state. With the tax advantage now gone and increasingly likely to be subject to enforcement, mid-sized e-commerce providers are more likely to establish a physical presence. This physical presence may be a small distribution center, shared space at a distribution center, or even a retail location that also serves as a direct-to-consumer hub. The increased importance of same and next day delivery to consumers is likely to increase the benefit of setting up such a facility close to metropolitan areas with many customers.
Although very small sellers are unlikely to be able to cost-justify additional warehouse investments, mid-sized companies are likely to view this tax ruling as sufficient to tilt the scales toward establishing a presence in states with a sales tax. The results from ARC’s recent survey of practitioners shows that fulfillment responsiveness is the warehouse capability most expected to increase in importance over the next five years. This is mostly due to increased customer expectations. However, I see this tax ruling as one more factor, albeit a marginal one, that is poised to increase supplier efforts to improve upon the responsiveness of their fulfillment operations. I plan to learn a little bit more about the potential impact this ruling may have on 3PL relationships and whether or not a 3PL fulfilling orders in-state for a retailer is considered a physical presence. If so, I expect the impact of this tax ruling to affect fulfillment outsourcing decisions as well.