Wal-Mart’s acquisition of Jet.com could impact Jet customers’ final purchase price, adding sales taxes the upstart online retailer has largely avoided so far.
Since a 1992 Supreme Court ruling (Quill v. North Dakota) on e-commerce sales tax collection, retailers have had to collect state sales taxes any time they also have a physical presence in the state, including not just stores but also fulfillment centers.
While e-commerce kingpin Amazon now collects sales tax in 28 states and counting as it boosts its nationwide fulfillment network, upstart Jet currently collects sales tax in only seven states. But Wal-Mart’s formidable network of 4,627 U.S. flagship stores and 653 Sam’s Club warehouse stores (plus its fulfillment centers) could force Jet to collect taxes in many more states, if not all of them.
For years, retailers have been dismayed by Amazon’s tax-free advantages, and have long argued for a more level playing field when it comes to online sales-tax collection. But efforts to require online retailers to collect state sales taxes have not been able to pass through the U.S. House of Representatives, largely because of a general anti-tax sentiment there. Following a series of court rulings, the only retailers obligated to collect state taxes on Internet orders are those with a physical presence in those states.
Although the online sales tax issue is known as the “Amazon tax” and is seen as one reason that Amazon was able to disrupt the retail industry, Amazon long ago threw in the towel on the issue, letting Congress know that it’s fine with the situation either way. That’s undoubtedly because Amazon has established fulfillment centers in nearly three quarters of the U.S., making it subject to sales tax collection in those states.
Like state “tax holidays,” the “Amazon tax” is not a huge driver or deterrent of overall sales, but a study from Ohio State University earlier this year found that adding sales tax has significant effects on some households, such as lower-income ones, and on some purchases, such as bigger ones.
Shoppers spent 8.3% less on products on Amazon once a sales tax was charged, with lower income households more likely to hold off on purchases and higher-income households less affected by it. Bigger-ticket items costing $250 or more were more affected by the inclusion of a tax, while non-tax collecting competitors often won some of Amazon’s business once Amazon had to collect tax, the study found.
The addition of tax can loosen the stickiness of even Amazon shoppers: Best Buy, which collects tax in all instances, picked up some of Amazon’s business once Amazon initiated its own tax collection efforts, suggesting that consumers may value the option of having physical stores nearby when they make a bigger-ticket purchase.
While any requirement for Jet to collect sales taxes based on Wal-Mart’s physical footprint seems up in the air at the moment, momentum is slowly but surely moving in states’ direction. The Quill decision has made it difficult if not impossible for states to collect taxes from e-commerce retailers, but as state budgets have become ever leaner, as state sales taxes have edged higher and as e-commerce has grown, state officials and legislatures are pushing for, and, in some cases, enacting change.