Small-business owner Lisa Johnson hopes the U.S. Supreme Court decision allowing states to compel online retailers to charge sales tax, even when sellers have no physical presence in the state, will motivate shoppers to return to locations like hers.
Johnson owns Culture Couture, a small purveyor of clothing, accessories and home décor on Church Street in Montclair.
“People are kind of getting sucked into the internet; if this is another thing that could help people get out of their house, I think it might have a broader impact in community involvement and civic engagement,” she said. “People assume the internet is their best and cheapest way to get things, but that might not be the case anymore if they’re adding sales tax. It might make people get out to see what’s out there.”
John Holub, president of the New Jersey Retail Merchants Association, is among those who hailed the top court’s 5-4 ruling June 21 in the case of South Dakota v. Wayfair Inc.
“What this will do is finally level the playing field between bricks-and-mortar and online retailers who continue to refuse to play by the same rules,” Holub said. “This is a huge, huge victory for Main Street retailers.”
Online sellers often have a lower overhead and advantage of scale that allows them to sell merchandise more cheaply than stores. Compound that with not having to charge sales tax and that’s when the advantage becomes unfair, said Craig Shearman, vice president of government affairs and public relations at the National Retail Federation in Washington, D.C.
“If sales tax is 6 percent in a given state and an online seller doesn’t have to collect sales tax, they can automatically sell their products for 6 percent more than anywhere else,” Shearman said. “Retail is a highly competitive industry where consumers go to the lower price. And if you can beat the competition by not having to collect sales tax, you can have an unfair advantage and very likely sell more than the next guy.”
Not only does this ruling create tax equity, but it in some cases makes certain New Jersey retailers look even more appealing than those in other states, because clothing isn’t taxed here.
Meantime, though the ruling has been seen as a win for Main Street, some say middle-market retailers could get squeezed.
“It’s fine for the big shots and it’s fine for the small mom-and-pops who don’t do enough business online,” said Gary Botwinick, a tax, trust, and estates lawyer at Einhorn Harris in Denville. “The Supreme Court’s decision was based on South Dakota’s law that exempted [out-of-state online] sales of $100,000 a year or less than 200 transactions. But the middle-market [retailer] who does more than that is going to get hit by it.”
One such retailer is Hoboken Farms, whose tomato sauce is sold nationally. Owner Brad Finkel said the biggest effect the ruling will have on him is the time it takes to file his taxes.
“We do a good amount of mail order, but there’s a lot bigger fish to fry than ‘am I gonna owe extra money.’ I’m more concerned I’m going to have to take more time to be able to file correctly,” Finkel said.
Hoboken Farms sells on its website and Amazon. If taxes become too much of a hassle, Finkel said he might go the Amazon-only route.
“My accountant might say it’s costing too much money to even deal with it and file in each state, so in that case [rather than] spend scarce resources to deal with it — money and time — I’d rather just say listen, we’ll ship it all to Amazon. They seem to do a pretty good job,” Finkel said.
Previously, though states couldn’t require out-of-state retailers to collect sales tax, New Jersey still tried to collect sales tax from the consumer. A metric study done by NJRMA determined that only 1 percent of filers in New Jersey declare anything on the line item regarding sales tax on the state income tax form.
“[For] any retailers located in New Jersey, you have no choice but to collect sales tax. But for people selling out of state, they were making New Jersey residents tax scofflaws,” said NJRMA’s Holub. “When we did a study on this eight or nine years ago, it was in the $300 million range that New Jersey was losing at the time. Obviously that number compounds with the increase in popularity of online shopping.”