A recent Supreme Court ruling regarding sales taxes and new tariffs on Chinese imports instituted by the Trump administration will impact many retailers, which could in turn have an effect on M&A activity in the retail industry.
As we previously reported, on June 21, 2018, the Supreme Court decided in South Dakota v. Wayfair that states can require online retailers to collect sales taxes in states where they are not physically present. The Wayfair decision overturned a 1992 Supreme Court ruling in Quill Corporation v. North Dakota (and the remaining portion of a similar 1967 case, National Bellas Hess v. Department of Revenue of Illinois), which held that under the Constitution, states could not require businesses to collect sales tax unless they had a physical presence in the state. Brick-and-mortar retailers had long argued that this gave online retailers an unfair advantage by allowing them to offer lower prices to consumers by avoiding charging sales tax. The Wayfair decision paves the way for eliminating this competitive edge long enjoyed by online retailers, which could impact the overall cost-benefit analysis when evaluating potential M&A transactions involving e-commerce businesses.
In addition to the recent case law related to sales tax, retailers may also be significantly impacted by an ongoing trade war between the United States and China. A new round of 25 percent tariffs on $16 billion of Chinese goods went into effect after midnight on August 23, 2018, which prompted China to respond with 25 percent tariffs on American goods. With this latest escalation in the trade war, each country has now imposed tariffs on a total of $50 billion of each other’s goods. Retailers have been vocally opposed to the tariffs, arguing that they will raise the price of goods for U.S. consumers and hurt sales both domestically and abroad. Companies are also concerned that the negative impacts of a trade war could reduce the benefits they have experienced from tax reform. It is possible that these anticipated effects could create a more unfavorable business environment, which could result in reduced retail M&A activity.
In light of the significant recent developments in taxation and trade policies, the coming months could be a time of great flux for retail companies, particularly those looking to engage in M&A transactions.