How Industrial Loses Under South Dakota v. Wayfair

WASHINGTON, DC–When the US Supreme Court announced its decision for South Dakota v. Wayfair last week, the narrative was largely around what the 5-4 vote meant for retail. Briefly, the court found that US states may impose sales taxes on Internet businesses, even if they don’t have physical locations in those states. Thus, online sellers — which have been responsible at least in part for the retail sector’s woes over the years — will finally have to pay state sales taxes.

To be sure the online-versus-brick-and-mortar retail dispute is more complicated than that as most large online retailers have been paying state sales taxes for some time and there is plenty of evidence that consumers shop on the Internet for reasons other than lower cost. But lost in the hubbub about how retail would be, or not, affected by the ruling, was an analysis about what it means for the industrial real estate asset class. To cut to the chase, smaller stores and the smaller pure play online sellers that rely on industrial and logistics infrastructure to move their goods are not expected to fare well under South Dakota v. Wayfair  — and that will ultimately affect industrial.

Here it must be said that industrial’s fundamentals are so strong that there is little that could stop its growth, including this decision. But on the margins it will have an impact and as time goes on industrial landlords could conceivably shift their patterns of acquisitions and development depending on how smaller online retailers react to the decision.

The reason, of course, is the outsized impact that e-commerce has had on the industrial sector in recent years. From 2010 to 2014, e-commerce was the third most active industrial sector, accounting for 16.1% of all “big-box” transactions nationally, just behind traditional retail and consumer non-durables (both with 16.7%), according to JLL. Over the last two years, e-commerce has become the most active sector at 22.5%, while traditional retail dropped to fourth at 10.4% as pure-play e-tailers and omnichannel retailers continue to build out their logistics footprint, JLL said.

A New Layer Of Regulation

This ruling could put a dent in this growth as smaller online retailers reconsider their distribution and sales patterns.

“Following today’s ruling, retailers will now need to track their business’ transactions across state lines and implement a sales tax collection service, which requires a fair amount of resources,” Natalie Kotlyar, leader of BDO’s Retail and Consumer Products practice tells GlobeSt.com.

Big box retailers with well-established e-commerce channels have the resources to take this change in stride, and many already have the functionality to track sales taxes across state lines, she says.

It is the smaller retailers that will feel the greatest squeeze with the new economic nexus standard, Kotlyar continues, since many already lack the capital and resources to adapt to this new requirement. “This adds another cost to their balance sheets.”

Weighing Whether It Makes Sense To Sell

Consider the mental calculations running through Alexander Babenchuk’s head. He owns a small e-commerce store called Limitless Bands, selling replacement Apple watch bands.

“To pay sales tax, my business would need to apply for registration in every state,” he tells GlobeSt.com. He notes that an average e-commerce business has profit margins of 30%. States vary in their sales taxes but he uses South Dakota’s law as an example, which requires e-commerce stores to charge 4.5% sales tax if they have more than $100,000 in annual sales or more than 200 individual transactions in that state.

“While $100,000 in sales sounds like a lot, in practice, depending on your profit margins it could be as low as $10,000 per year in revenue. Two-hundred individual transactions, depending on what you are selling, could be $200 per year in sales or revenue,” he says. From that perspective, Babenchuk goes on to say, it would not even make sense to sell in South Dakota. “In fact, if every state enacted minimums as low as South Dakota is proposing, I would think that e-commerce owners will be forced evaluate in which states to sell in and which to ignore.”

“A Flood Of Legislation”

There is little doubt that most states will enact new laws, says Marvin Kirsner, a shareholder in Greenberg Traurig’s Tax Practice. “This ruling will create a flood of legislation similar to the South Dakota law,” he tells GlobeSt.com.

Indeed, there are over 10,000 taxing jurisdictions across the US, Mark Friedlich, Senior Director, Global Content Assets at Wolters Kluwer Tax & Accounting, tells GlobeSt.com. “This story has not ended, and one must be ready for a change in economic nexus likely to be adopted by many other states,” he says.

That is true for retail, certainly, but also industrial.