By Joshua Burd
A recent ruling by the U.S. Supreme Court will likely raise the cost of some online sales and provide an infusion of revenue for New Jersey’s state coffers, but its impact on commercial real estate may be limited.
The 5-4 opinion in the case, South Dakota v. Wayfair, ruled that online retailers must collect sales tax from customers even in states where they don’t have a physical presence. In the process, the court overturned a 26-year-old standard for e-commerce and effectively closed a loophole that has long been seen as a disadvantage to brick-and-mortar retailers.
Instead, the court upheld a South Dakota law that required online retailers and other remote sellers to collect and remit sales tax if they had more than $100,000 of sales or more than 200 transactions in the state in the prior year. Many other states are now expected to adopt that model via legislation, including New Jersey, which factored the new rules into its fiscal year 2019 budget and projects to collect about $188 million in additional revenue.
When it comes to commercial real estate, the impact is far less clear and may in fact be minimal. Experts say New Jersey’s industrial sector will likely be unchanged by the end of the physical presence rule: Given its highway network and access to the country’s largest consumer base, the state is already a coveted destination for fulfillment centers, meaning it’s nearly impossible for it to become more attractive than it already is.
“This is really more about remote sellers,” said Chris Colyer, a partner in the tax services group with Wiss & Co. LLP in Clifton. “From a New Jersey point of view, it’s really more consumer-based.”
Colyer and other experts noted that the ruling in fact would expand the state’s ability to raise revenue through sales tax collections. Amazon has been collecting and remitting sales tax in New Jersey since 2013 under a deal struck with policymakers, but there are other companies that have manipulated the physical presence rule that will be now be subject to new rules.
Under a law passed by both houses of the state Legislature in late June, New Jersey will begin to collect sales tax starting Oct. 1 from remote sellers that meet the sales or transactions threshold in the Garden State.
Brick-and-mortar retailers and others in commercial real estate hailed the June 21 Supreme Court ruling after years of pushing for what was known as e-fairness. Tom McGee, CEO and president of the International Council of Shopping Centers, said the decision was “a positive step toward creating a level playing field for retailers, and it will serve to strengthen the industry as a whole for years to come.”
“The physical-nexus standard hampered industrywide competition and kept valuable tax revenues from local communities,” McGee said in a statement posted on the organization’s website. “We understand this is a critical turning point in a long process, but [we] look forward to working with policy makers and business owners to find state-level legislative solutions which promote fairness and competition.”
Others question if a level sales tax playing field will actually divert more business to physical stores.
“Had they made this decision 25 years ago, it would have certainly slowed down the incursion onto online, because it was about an 8 percentage point benefit,” Jan Rogers Kniffen, a retail consultant and CEO of J Rogers Kniffen WWE, said during an interview June 21 on CNBC’s “Power Lunch” program. “You were 8 percent cheaper if you were selling online than if you were selling in brick-and-mortar.”
Kniffen, a contributor to the network, added that “it’s very clear that it made a big difference as far as online penetration. But today, online is the way we’re doing business. It’s not going to change the rate of penetration online by very much.”
The ruling overturned another landmark opinion, Quill Corp. v. North Dakota in 1992, which held that states could not collect tax from online sellers unless they have a physical presence in the state. The Wayfair ruling now allows states to collect sales tax based on what’s known as an economic nexus rather than a physical nexus.
While the change may have been imminent, especially in light of the explosive growth of e-commerce, experts say the Wayfair ruling has created uncertainty in other areas. Jaime Reichardt, an attorney with Sills Cummis & Gross PC, noted that states began to push back on the physical presence test over the years, prompting South Dakota and others to adopt rules for sellers that earn above a certain “bright line” of sales to determine their economic nexus.
“I think the Wayfair decision, while it answered the question of ‘Do we need a physical presence in the state?’ it left more questions than answers,” said Reichardt, who chairs Sills Cummis’ state and local tax practice. “At the very least, in a Quill world … we knew there was a rule — physical presence or not — and we had a bright line, no-questions-asked rule.”
But with new weight given to economic nexus, Reichardt said there are now questions about how the decision will impact other types of state taxes. For instance, he said, the ruling could open the door for states to adopt even more expansive economic nexus rules for income and business activity taxes, among others.
Reichardt also said the majority in the Wayfair case addressed potential concerns about the burden of compliance for smaller and midsized sellers, citing advances in software or programs that will facilitate the process for online retailers and state treasuries.
Kniffen made a similar point during the appearance on CNBC.
“Somebody’s going to put that app together in about 12 second so that you can collect the sales tax every place you need to,” he said. “All of the big guys already have that application in place. Somebody will provide that to the small players.”