Did the Supreme Court Just Save Brick and Mortar Retail?

Yesterday in a momentous 5-4 decision, the Supreme Court of the United States overturned a precedent and made new law.  It will have reverberations around the country.  It could help Megalytics, a startup our fund is invested.

The precedent they overturned was known as the “Quill” case.  Ironically, it involved a good friend of mine Steve Miller.  Steve started and runs Origin VC here in Chicago.  His family had started Quill and states wanted them to collect local and state sales taxes from customers when they sold in areas where they didn’t have a physical presence.  At the time it was really arduous to collect those sorts of taxes and would have increased the costs to the company making it extremely difficult even to execute the business.  Quill’s case paved the way for internet ecommerce.

Back then, the nascent internet technology hadn’t taken hold.  Most over the border commerce was done by catalog and mail order.

In a very rousing opinion, Justice Kennedy overturned the physical presence precedent.  Here is a link to the entire opinion, and the dissent.  Justice Ginsburg, Justice Gorsuch, Justice Thomas and Justice Alito concurred.

Kennedy writes, “Because the physical presence rule as defined by Quill is no longer a clear or easily applicable standard, arguments for reliance based on its clarity are misplaced. Stare decisis may accommodate “legitimate reliance interest[s],” United States v. Ross, 456 U. S. 798, 824, but a business “is in no position to found a constitutional right . . . on the practical opportunities for tax avoidance, Startups and small businesses may benefit from the physical presence rule, but here South Dakota affords small merchants a reasonable degree of protection. Finally, other aspects of the Court’s Commerce Clause doctrine can protect against any un- due burden on interstate commerce, taking into consideration the small businesses, startups, or others who engage in commerce across state lines. The potential for such issues to arise in some later case cannot justify retaining an artificial, anachronistic rule that deprives States of vast revenues from major businesses.”

The dissenters were Chief Justice Roberts, Justice Breyer, Justice Sotomeyer, and Justice Kagan.  The dissent was mostly on procedure.  The dissenters felt that under the US Constitution, Congress would be the better place to adjudicate this dispute.  So, the court was a bit split among judicial ideologies.

I think this is a fair debate over the role of the courts versus the role of the legislative branch and the role of the executive branch.  It winds its way through all kinds of controversial issues that divide America today.  In this case, it’s interstate commerce.  In others it might be abortion or immigration.  It’s healthy for us to have this debate if we are civil about it.

The first group of folks dancing a jig were government bureaucrats who are in charge of budgeting and collecting taxes.  As per usual, most government budgets are in shortfall.  They need new ways to tax and charge fees to their citizens. SCOTUS just made it legal to collect sales tax on every thing sold to anyone from anywhere.  However, I don’t think that they will see the revenue they expect.  Government budgeters always tend to be too aggressive when calculating potential tax revenue, and potential returns from investment.  They also always have a tendency to understate future expenses.

The second group of folks that have a smile on their face today are the brick and mortar retailers.  They have felt that the Quill decision was totally unfair for many years now and consistently sued to get it overturned.  They got their victory yesterday.

If your business is totally online, you are frowning a bit today.  SCOTUS just increased your costs by forcing you to charge sales tax to every customer.  At least there should be a technological solution to the problem that should be cheap to implement.  Businesses like Amazon have been charging sales tax for a while now, at least in Illinois.  It’s not a difficult problem to solve like it was in 1990.

My initial take is that this might not be an advantage to traditional brick and mortar retailers.  They still need to get people out of their homes and into the store.  Initially, it might have been that the tax savings was a good enough incentive for people to shop online.  Today, I don’t think that is necessarily the case.

A large amount of small businesses have set up online.  They are now faced with figuring out how to charge sales tax and it might make an aggregator like Amazon or Etsy even more powerful than it is today.

When walking around big cities like Chicago or New York, you see a lot of places boarded up or for lease.  That’s not necessarily because of the Amazon effect on retail.  Often it is because of the very high fees city governments already charge for doing business physically inside their borders.

Erika Murphy of GlobeSt.com wrote an opinion piece on the decision.  It’s behind a paywall. She writes, “Surveys by comScore show that the lack of sales tax is the primary factor motivating only 10% of online sales, while free shipping (54%) and the availability of exclusive online deals (23%) are far more important.” University of Richmond tax law expert Hayes Holderness says, “Amazon quite expertly has flipped the script on e- commerce from “buy it sales tax free” to “buy it conveniently from your home.” “In light of this change, don’t expect the ruling to hurt the growth of e-commerce in any significant way.”

For my part, I think it could provide a tailwind to Megalytics.  They utilize big data and proprietary algorithms to analyze risk in commercial real estate transactions.  They also can analyze ongoing tenant financial health. Currently, the methods that the CRE industry uses to analyze all this stuff are pretty poor data sources and their gut.

Megalytics can also use demographic data to discern a probabilistic outcome if a potential tenant will do well in a certain location or not.  In Chicago, there was a spot in a retail strip mall on the north side of the city that had a series of tenants that failed constantly.  Megalytics did demographic analysis and discerned the kind of business that would do well and the strip mall operator sought out that business.  The business has done very well since establishing their operation inside that strip mall.  Happy strip mall owner, happy business, happy community.