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Online sales taxes not a boon. It’s all about clicks, not bricks

U.S. Supreme Court’s Wayfair ruling forced online retailers to charge sales taxes, but it doesn’t seem like it helped brick-and-mortar stores in the Ninth District

December 19, 2019

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Article Highlights

  • States collect more online sales taxes, but total impact modest

  • Brick-and-mortar stores’ struggles continue despite level playing field

  • Consumers browse in person, shop online

Online sales taxes not a boon. It’s all about clicks, not bricks

For years, brick-and-mortar retailers in communities like La Crosse, Wis., and throughout the United States complained that they were the victims of unfair competition by online retailers who didn’t have to pay state sales taxes.

So, after the Supreme Court ruled in 2018 in the landmark South Dakota v. Wayfair case that online retailers did have to pay sales taxes, there was hope. That hope was that, at times like the recent holiday shopping season, brick-and-mortar retail would make a comeback.

Think again. Tax statistics boldly confirm that people are shopping with their clicks, not their feet, the continuation of a deepening and disappointing trend for many local stores and malls.

“They don’t feel it,” Vicki Markussen, executive director of the La Crosse Area Chamber of Commerce, said of brick-and-mortar retailers in her market area. “We know [taxing online retail] helps. It certainly makes [brick-and-mortar retailers] feel like they are more competitive. But their biggest challenge is consumer buying preferences, and consumers like the convenience of buying online.”

“[Brick-and-mortar retailers’] biggest challenge is consumer buying preferences, and consumers like the convenience of buying online.” —Vicki Markussen, La Crosse Area Chamber of Commerce

Nearly a year after Wisconsin started collecting sales taxes from all online retailers, online retail appears to have grown even faster, while brick-and-mortar retail stagnated, a pattern seen throughout Ninth District states.

Markussen noted that at least states and local governments can now get the revenue that’s rightfully theirs. But even when it comes to online retailers, the states aren’t getting as much as anticipated.

Shortfall in tax haul

The Government Accountability Office projected prior to the Wayfair decision that state and local governments could have collected at least another $8.9 billion in 2017 if they could tax remote sellers; all figures in this story are adjusted for inflation.

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Among states in the Minneapolis Fed’s region, the GAO projected that Michigan could gain at least $221 million each year, Minnesota $132 million, North Dakota $34 million, South Dakota $33 million, and Wisconsin $123 million. Montana does not have a sales tax. These are actually relatively small amounts in comparison with the total sales tax revenue these states collect.

In states that calculated how much sales tax was collected from remote sellers after the Wayfair decision, none in the Ninth District reached the GAO’s projection.

Minnesota appears to have come closest with a projected revenue of $81 million over the first eight months of the new sales tax. Assuming another $5.9 million if every local government levies an additional sales tax—not all do—this works out to $10.9 million a month, still a bit short of the $11.5 million average needed to reach the GAO’s low-end projection. These figures aren’t seasonally adjusted, but they do encompass the holiday shopping season, when retail sales are traditionally at their highest.

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Wisconsin averaged an estimated $6 million a month, far short of the GAO’s $10.7 million projection, and South Dakota averaged an estimated $1.6 million, short of the GAO’s $2.9 million projection. North Dakota reported collecting $27.1 million in state and local sales taxes since the day of the Wayfair decision, which works out to $18.7 million a year, also short of the GAO’s projection. Michigan projected revenue of $15.3 million, short of the GAO’s $18.4 million projection.

Part of the reason for this apparent shortfall may be that forecasters didn’t account for how much online retail is conducted by businesses that already had to pay sales taxes, according to critics of these forecasts. Amazon is a good example. As the company grew, it built facilities throughout more and more states and paid sales taxes in those states. By the time the Supreme Court decided in the Wayfair case that a seller didn’t have to have a physical presence in a state to owe that state taxes, the world’s biggest online retailer had been paying sales taxes in most states for years.

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In 2014, the first full year Amazon paid sales taxes in Wisconsin, revenues from sales and use taxes (use taxes are a small percentage of the total) in the non-store retail category leaped 28 percent in one year. The post-Wayfair boost was almost as impressive at 22 percent.

North Dakota Tax Commissioner Ryan Rauschenberger said his state, which has had an Amazon presence since 1999, was never comfortable with others’ projections. His office actually told lawmakers in late 2018 to expect only $10 million the first fiscal year, he said.

But that figure is expected to be a lot higher in future years as more remote sellers pay taxes. Rauschenberger said he understands that so many sellers tried to register in so many states that even now there’s a significant backlog among firms providing registration services.

Definitions

As a cautionary note, a number of terms used here sound as if they’re interchangeable, but they are not. They simply overlap very closely.

“Remote sellers” is used in the Wayfair decision to describe businesses lacking a physical presence in the state trying to tax them. Online retailers may or may not be remote sellers, depending on if they have a distribution center or some other physical presence in the taxing state.

“Non-store retailers” is used in some states for a variety of retailers, including online retailers as well as vending-machine operators. It’s assumed that online retail dominates all of these categories; nationally, online retail sales accounted for about 90 percent of non-store retail sales.

Brick-and-mortar stagnation

The Wayfair decision and, to a lesser extent, Amazon’s earlier decision to pay sales taxes seem like they have leveled the playing field for brick-and-mortar retail, but that’s simply not the case. The competition remains lopsided.

The Wayfair decision and, to a lesser extent, Amazon’s earlier decision to pay sales taxes seem like they have leveled the playing field for brick-and-mortar retail, but that’s simply not the case. The competition remains lopsided.

Statistics for taxable sales—the volume of sales subject to taxes—back up the often bleak news reports of brick-and-mortar retail’s struggle as former mall anchors such as Sears and Macy’s close stores and smaller retailers lose ground.

In Minnesota, taxable sales by non-store retailers followed brick-and-mortar retailers downward during the Great Recession, but their fortunes diverged during the recovery. Brick-and-mortar retail stagnated, while non-store retail grew.

Between 2015, the first year Amazon began paying sales taxes, and 2017, when detailed tax statistics end, non-store retail grew 25 percent, while brick-and-mortar retail grew 1 percent.

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In South Dakota, taxable sales by non-store retailers grew 44 percent in the first 10 months after Amazon agreed to pay sales taxes and 150 percent in the first 10 months after remote seller sales taxes were collected in the wake of the Wayfair decision.

Over the same periods, taxable sales by brick-and-mortar retailers grew 1 percent and shrank by 0.5 percent, respectively.

Obviously, some of the growth in non-store retail is existing sales that became taxable, and some is new sales. And there are certainly success stories among brick-and-mortar retailers, such as Target and Best Buy, that may have been buried in the statistics by the decline of stores such as Sears and Macy’s. Still, the bottom line is brick-and-mortar retail didn’t grow.

“As consumers change their spending habits from traditional brick-and-mortar retailers to e-commerce, it appears much of the sales tax related to remote sellers has been a shift from this change in spending behavior,” said Wade LaRoche of South Dakota’s Department of Revenue.

In Wisconsin, taxable sales by non-store retailers grew 40 percent in the first 10 months after Amazon agreed to pay sales taxes and 22 percent in the first 10 months after remote seller sales taxes were collected.

In stark contrast, taxable sales by brick-and-mortar retailers (not including auto sales, which are usually not included in other states’ sales tax statistics) shrank by 0.4 percent in the first period and grew a measly 0.2 percent in the second period of time.

Then there’s the shopping process that sometimes makes matters worse.

The La Crosse Chamber’s Markussen said consumers claim to love their local businesses, but they still do more of their shopping online. Retailers report seeing shoppers come in to look at their merchandise and then leave to order it online.

“It’s a consumer disconnect,” Markussen said. “I honestly don’t think that they see the harm in doing that. But eventually those brick-and-mortars are going away.”

Tu-Uyen Tran
Tu-Uyen Tran
Senior Writer
Tu-Uyen Tran is the senior writer in the Minneapolis Fed’s Public Affairs department. He specializes in deeply reported, data-driven articles. Before joining the Bank in 2018, Tu-Uyen was an editor and reporter in Fargo, Grand Forks, and Seattle.