November 12th, 2018

How the Wayfair Sales Tax Ruling May Affect Your Brand

This is a guest post by Brian Sengson of Bennett Thrasher LLP.

Brian Sengson, State & Local Tax Manager
Bennett Thrasher LLP

On June 21st, a landmark court ruling significantly changed the sales tax landscape for many online retailers and remote software companies. According to the U.S. Supreme Court’s recent decision in South Dakota v. Wayfair, internet retailers can now be required to collect sales tax in states in which they lack a physical presence. In a strongly worded opinion, the Court’s ruling overturns 26 years of precedence, leaving companies to question how, and to what degree, this ruling impacts them.

What did the Wayfair ruling change?

Historically, states could only mandate companies to collect and remit sales tax on sales made to states where the taxpayer had physical presence (commonly referred to as the Quill physical presence rule). Generally, physical presence was denied as having employees or a physical location, such as an office or warehouse, in that state.

However, in recent years, states began a campaign to override the physical presence standard with a focus on online retailers. States began passing “economic nexus” laws, attempting to redefine or directly contradict the notion of physical presence. Specifically, these laws create sales tax nexus based on certain transactional thresholds.

Many regarded these efforts to tax out-of-state companies as reminiscent of “taxation without representation,” but the states had valid concerns. For example, under the physical presence standard, companies like Wayfair or Amazon had a pricing advantage compared to brick-and-mortar retailers. In a broader sense, technology companies, such as SaaS providers, were notable contributors to lost sales tax revenue — upwards of $33 billion each year.

For Wayfair specifically, at issue was South Dakota’s economic nexus law, which required companies to collect sales tax if it has at least $100,000 in sales or at least 200 transactions with customers in the state. In a 5-4 majority ruling, the Court overruled the Quill physical presence precedent and deemed South Dakota’s economic nexus as Constitutionally appropriate. The Court reasoned that the state’s law better reflects today’s economy and referred to physical presence rule as “unsound and incorrect.”

What does this mean for brands and retailers?

With the prevalence of eCommerce in the retail industry, retailers are especially at risk of unintentionally creating expansive sales tax nexus and, as a result, increased compliance measures or potential tax liability. In fact, to date, over 25 states have either passed or proposed a rule similar or even more aggressive than South Dakota’s economic nexus law — and that list continues to grow.

It is important to emphasize that these new laws often present two means in which a retailer has nexus: materiality (sales) or frequency (transactions). As a result, even if a retailer’s sales into a state does not exceed $100,000, but has 500 separate sales to the state, then the retailer will still have sales nexus. More importantly, some states’ thresholds are now as low as $10,000 in sales to have some state filing or reporting requirement.

What if I don’t comply?

Outside of an impending audit and resulting penalties, a company’s exit strategy creates another impetus for companies to further evaluate the Wayfair impact. For example, when undergoing an acquisition, sales tax exposure is a frequent issue during due diligence; often requiring sellers to put a portion of the purchase price in a holdback escrow or, at times, cancelling the deal altogether.

In no uncertain terms, Wayfair is a landmark ruling for eCommerce, online or remote sellers, with far-reaching implications. Wayfair alters the sales tax landscape, creating substantial uncertainty, and should not be taken lightly.

Brian Sengson, Esq.
Bennett Thrasher

Team Ally

Posted in Brand Manufacturers

February 12th, 2019

Selling on Amazon: 3 Brands That Own Their Relationship with the eCommerce Retailer.

This is a post by Paul D’Arrigo, Co-Founder of Ally Commerce.

Lessons from Brands That Have Already Had Success

Amazon says they have an “open marketplace” and they can’t control sellers, but Amazon also carries a lot of weight in the digital marketplace and can put a lot of pressure on brand manufacturers. Often the imbalance of power results in Amazon getting a better deal out of the relationship. For manufacturers trying to manage their customer experience, this can be a significant challenge as they attempt to reach their consumers’ demands while working with the retail giant.

However, a few brands have managed to successfully take the reins of the relationship, including Nike, YETI, and Bose. With a combination of strong brand presence, high consumer demand, and unforgettable customer experiences, these brands were able to leverage their market dominance to create a profitable Amazon channel while still maintaining their brand and their direct to consumer business. Let’s take a look at how they did it.

Brand #1: Nike

The situation: Nike has spent its lifetime creating an affinity for its brand. They knew that by selling on Amazon, they’d be handing over control of the brand experience, so for the longest time, they opted not to explore their options with the marketplace. Amazon, however, relentlessly pursued the relationship for more than ten years. Why? Because despite Nike not selling directly on Amazon, it was the most purchased apparel brand on the site. Amazon conceded that they couldn’t replicate what Nike does, and instead wanted to negotiate with them. This put Nike in the driver’s seat — a rarity when it comes to the relationship between Amazon and brands.

What worked for Nike: We’re speculating here, but Nike products used to be sold by a lot of individual dealers, and now there are fewer on the market. All signs point to Nike demanding that Amazon “clean house” before signing an official agreement. Now, Nike gets the benefits of selling on Amazon, while also eliminating some of the marketplace competition that existed on the channel.

Brand #2: YETI

The situation: YETI’s brand is so influential with consumers that they negotiated “the holy grail” of partnerships with Amazon: YETI gets to be a seller on Amazon, doesn’t have to sell their products to the e-tailer at wholesale prices, AND the products are still available for Prime. Amazon was so interested in being a part of the YETI market that they were settled for a true partnership rather than an aggressive revenue share. This is a win-win YETI — they don’t have to share a 40-50% profit margin with Amazon for each sale, but they still get to benefit from the perks of the Amazon relationship.

What worked for YETI: Amazon likely needed the product to be a relevant destination for the brand name, but YETI is so powerful they were able to keep the margin for themselves. YETI also showed no minimum advertised price (MAP) violations — meaning that no seller of YETI, on Amazon or likewise, is selling a YETI product at a discounted price. For example, a YETI Roadie is sold at roughly $200 anywhere you shop — this is a huge advantage for YETI since it puts their product on more channels but doesn’t lessen the draw of purchasing the product on their own website.

For the “new” YETI Roadie products on Amazon, nothing is listed below $199.99, and once added with tax, the total price is well over $200. Even for the “Used – Like New” product from the Amazon Warehouse, the price point is competitive; once you add the tax to $188.15, it’s $201.32.

Brand #3: Bose

The situation: Bose is a powerful brand that does not waver on pricing and has a lot of control over dealers and how its products are perceived in the marketplace. With their high-quality noise-canceling headphones, Bose has dominated the market as the preferred brand for music aficionados, and with its own successful direct to consumer outfit, Bose is not at the mercy of the dealer.

What worked for Bose: Because an influential brand like Bose is so desirable, Amazon is willing to go the extra mile to make them happy. Amazon has made it extremely difficult for other sellers on its marketplace to be successful selling Bose products by actively preventing individual sellers from selling an item as new — even if the product is new.

As illustrated above, each of the descriptions under “Used – Like New” says much of the same thing: This product is new, but I am unable to categorize it as “New.”  With Amazon blocking sellers from listing products as new, Bose gets the opportunity to manage how new products are delivered — in pristine condition, with on-brand packaging — and also creates preferential treatment for Bose-approved dealers, as they are the only ones delivering “New” products.

So, how do you get that influence?

Being successful in spite of Amazon’s dominance is not a stroke of luck. Brands with a strong presence are the result of strategic positioning and brand development. Here are the critical considerations for growing your brand so you can wield power when negotiating with marketplaces like Amazon:

1. Control the dealer network. To successfully control the dealer network, your brand needs to remain consistent across channels, and you need the capability to meet the consumer demand on your own. To do that, you’ll not only need a strong eCommerce channel, but you’ll also need an equally strong brand experience that provides a great customer experience so that you can maintain the power of your brand. With a partner like Ally, we can help you own your direct to consumer brand experience so that your brand reaches the ultimate goal: Price consistency across channels.
2. Maintain a strong representation. As an eCommerce brand, your product is most likely available in many places. To maintain the strong reputation you need to gain leverage with a marketplace like Amazon, you need to ensure that no matter where you’re sold, your product is well taken care of, in terms of delivery, as well as price. A brand like YETI is incredibly successful at this. The cooler company can be found at many different locations: ACE Hardware, Home Depot, local liquor stores, and now Amazon, but the brand maintains its price point, and it’s lifestyle draw, despite being sold by multiple retailers.
3. Deliver a “lifestyle.” By controlling the message and how your brand is perceived, you maintain control over the customer and their relationship to your product. This is the experience; the much-coveted “lifestyle.” Nike is great at this. They don’t just sell yoga pants; they sell potential. It’s a big difference between selling a product and a lifestyle, and it’s something that a marketplace like Amazon (who offers lots of products and appeals to many different needs) can never replicate. Instead, as we’ve seen with Nike, they can only get in on the lifestyle as a dealer.

Take back control.

Should your brand sell on Amazon? That’s the age-old question. But the truth is that if you do doesn’t make the difference — it’s how you do it.  Ally gives your brand a leg to stand on so that selling on Amazon is a great option but not the only option. From helping brands create or improve their online presence to managing the delivery of a white glove distribution process, Ally can help you create the kind of brand that doesn’t rely solely on Amazon. And when you’re not wholly dependent on the retail giant, it’s easier to control the relationship.

About the Author: Paul D’Arrigo, Ally Commerce Co-founder

As Chief Operating Officer at Spend Management Experts Paul manages the IT, Finance, Legal and HR functions. Paul has 15 years of experience in logistics, fulfillment, and eCommerce and is focused on the continual improvement and scaling of SME’s operations and proprietary technology. He has built eCommerce retailers and service providers from the ground up, spearheading the development of industry-changing technologies. After a career starting at UPS Supply Chain Solutions as an Industrial Engineer, Paul co-founded a Pro-Audio online retailer rated in 2011 as the #2 Fastest Growing Retailer according to the Inc 5000. Using the technology and expertise developed from being a leader in the eCommerce industry Paul co-founded an eCommerce services company that closed multiple rounds of funding, was featured in the Wall Street Journal and continues to operate today. Paul has a Bachelor of Science in Industrial Engineering from Georgia Institute of Technology.

Paul D'Arrigo

Posted in Amazon, Brand Manufacturers