Consumer Business Compass Newsletter - Fall 2016

September 2016


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Table of Contents


The Evolving State Sales and Use Tax Nexus Standards: What e-Retailers Need to Know

By Mike Metz     
With election season in full swing, potential state tax reform should be top of mind for e-retailers. Recent and possible future state sales and use tax nexus developments revive questions around the expansion of sales and use tax nexus standards by the states. Historically, states have been unable to require the collection of sales tax from out-of-state retailers unless the retailers had a physical presence in that state. As a result of the growth in online sales by e-retailers, some states have recently enacted measures intended to confront the U. S. Supreme Court’s physical presence standard and the mandate of the collection of state sales and use taxes by out-of-state retailers that do not have a physical presence within a state.

In Quill Corp. v. North Dakota, a 1992 U.S. Supreme Court decision, the Court reaffirmed its physical presence nexus standard (that originated with the Court’s 1967 decision in National Bellas Hess v. Illinois), at least for sales and use taxes. Only once a physical presence is established within a state is a state allowed to require an out-of-state business, including an e-retailer, to collect and remit sales and use taxes on the business’s sales to in-state consumers. Due to the lack of a physical presence in most states where e-retailers’ customers are located, an increasing volume of sales and use taxes on internet sales are not being collected.

States see the increase in internet sales and their inability to tap into this growing state tax revenue source. Although e-retailers’ in-state consumers have an obligation to self-assess and remit use tax on their internet purchases, these require individual and voluntary self-assessment, and states find it difficult to enforce such compliance on their individual in-state consumers.

While some states, such as Colorado, Louisiana and Oklahoma, have recently imposed use tax notification requirements in which e-retailers are required to notify consumers in those states of their use tax compliance responsibilities with respect to their internet purchases, other states are directly challenging the physical presence standard. South Dakota, for example, passed a new law this year which creates a sales and use tax nexus standard that goes beyond physical presence. The new law states that if a retailer has more than $100,000 of sales to South Dakota customers or 200 or more separate transactions with South Dakota customers, the retailer is considered to have sales tax nexus with South Dakota, even if it does not have a physical presence in the state. Even though this new nexus standard is in direct conflict with the Quill physical presence nexus standard, South Dakota has been aggressively enforcing compliance and collection of taxes with its new law. Some e-retailers and trade associations have been fighting back by challenging the constitutionality of the new state law.

In addition to South Dakota, Alabama and Vermont have enacted similar “economic nexus” provisions targeting e-retailers for sales and use tax collection. Further, the Tennessee Department of Revenue has recently issued a proposed rule that would follow similar economic nexus sales and use tax provisions adopted by Alabama.

What does this mean for e-retailers?

It’s still possible that pending legal challenges to these economic nexus sales and use tax provisions in South Dakota and other states could eventually reach the U.S. Supreme Court. Based on Justice Kennedy’s concurring opinion in the Court’s Direct Marketing Ass’n v. Brohl decision, the Quill physical presence nexus standard for sales and use taxes could be overturned if the court accepts a case for review. Unless or until that happens, the court appears inclined to let the U.S. Congress settle the issue. Although there are bills pending in the House and Senate, the U.S. Supreme Court could grow impatient.

In the meantime, the future of sales and use tax nexus standards for e-retailers is uncertain. Given this uncertainty, e-retailers should evaluate the potential risks and costs of state sales and use tax nexus exposure with states that are enacting economic nexus sales and use tax measures, as well as other expanded nexus and use tax notification requirements. They should continue to review their sales activity in states in which they do not have a physical presence and, thus, have not historically believed they had a requirement to collect and remit tax.

Mike Metz is the Tax Office Manager Partner of BDO’s Minneapolis office. He can be reached at

BDO Spotlight: Q&A with Mike Metz

What led you to focus your accounting work in the consumer business industry?

I’ve always been intrigued by the wide range of business practices consumer businesses employ, and the Minneapolis area houses a large pool of these organizations such as Target and Best Buy.

What are some of the biggest opportunities for growth that you see in the consumer business industry?

The juxtaposition of traditional brick-and-mortar retailers versus e-retailers is fascinating. As consumers shift more of their spending to e-commerce, it’s creating a huge opportunity for traditional retailers to expand into the digital space. Currently, e-retailers have so few barriers for entry into the market that traditional retailers might consider looking to digital and seeing where they can take advantage of e-commerce as well.

What challenge do you see many consumer businesses struggling with right now?

Consumer trends are always the wild card. For example, in the apparel space, we’re seeing big changes in the traditional business professional dress-code. Suddenly, there are far fewer suits and ties as professionals opt for a more casual, yet fashion-forward wardrobe while still enjoying high-quality materials. This shift isn’t just a seasonal change, but an overhaul of the status quo in business apparel.

What do you see as the overall impact of the work you do?

Our analysis of industry trends can help clients anticipate what lies ahead and enable us to project how their needs may evolve. I’ve had a number of industry executives mention that our proprietary surveys and reports, like our 10th annual Retail RiskFactor Report, help them forecast what’s trending in retail.

What other tax areas interest you?

I’ve gotten more involved with the technology industry in recent years, and see more technology-focused tax issues entering consumer businesses such as the emergence of research and development tax credits for software development.

Technology functions within consumer business companies continue to mature. Senior level IT people are finally being given a seat at the table in discussions about operations, risk management and strategy. More techies from consumer business companies are speaking at conferences. I’ll be interested to see how this continues to evolve.

What major events are retailers watching as they look ahead to 2017?

The presidential election may have an impact on consumer sentiment both before and after November. Interestingly, historical consumer sentiment shows that over the past half century, nearly all presidential elections occurred in years in which consumer sentiment was at its highest, with only two exceptions: Carter and Bush, both candidates who lost their bids for reelection. This year’s election is certainly unique, so only time will tell if sentiment follows the same trend.

If you could give one piece of advice to your clients, what would it be?

A strong company is only as good as its foundation: Your team. Take the time to invest in your finance and IT people. Seasoned professionals are just as important in these areas as they are in merchandising. This is especially salient as e-commerce becomes a main segment in retail.

As retail evolves to become more digital, there are increased security concerns such as cyber attacks and the new chip card technology to keep up with as well. Without dedicated professionals who specialize in these areas, it could be easy to lag behind.

Update on the Status of the Distressed Retail Industry

By David Berliner and Nick Weber

Rising pressure to compete with e-commerce and keep pace with changing consumer preferences is forcing many retailers to shed heavy costs tied to their brick-and-mortar stores. Consumers’ discretionary spending is shifting more toward technology and food, instead of the apparel and accessories sold by traditional retailers. Bankruptcy filing documents of many well-known national retailers (listed in the table below) cite these influences among the factors leading to bankruptcy.

While bankruptcy may not be an issue for well-managed and well-capitalized firms, these same forces are putting downward pressure on the physical retail industry. Traditional retailers’ burdensome real estate cost structures leave little room for error when combined with tight liquidity and high debt levels. Many retailers are closing stores in response. For example, on Aug. 11, 2016, Macy’s announced that it would shut 100 stores, or about 15 percent. In addition, according to S&P Capital IQ, major retailers have closed thousands of stores over the past year because of the financial strain caused by unprofitable physical locations. The below table is a sample of store closings that have occurred in the last 15 months.

Still, many retailers have too many brick-and-mortar stores. But, reducing the number of stores may not be enough. Other strategies should be considered to restructure real estate portfolios, such as reducing the square footage of stores or examining the profitability and life of the lease at each store in a retailer’s portfolio. Retailers can then assess whether buying out unprofitable stores’ leases, negotiating with landlords to reduce the size of the stores, or continuing to operate unprofitable stores is the most advantageous. A July Wall Street Journal article on the demise of the department store as a traditional anchor mall tenant suggests that compact stores, with more efficient sales-to-square-foot ratios, are poised to succeed.

The second half of the calendar year is a key period for retailers as back-to-school and holiday shopping are the two largest events in the year. According to the National Retail Federation, 46 percent of consumers plan to buy back-to-school items online compared to 35.6 percent in 2015. The shift to e-commerce is foreboding as back-to-school revenues are typically used to help build inventory for the critical holiday season. Liquidity could become an issue for retailers if back-to-school spending is not strong enough. Traditional retailers with high debt and inefficient cost structures could be faced with restrictions on credit or forced to pay cash in advance to purchase inventory. To hedge this concern, in addition to rationalizing real estate portfolios, distressed retailers might also consider exploring private equity financing.

Private equity may be an option for retailers who need a quick infusion of capital but are struggling to secure additional debt financing. Tapping PE financing can provide multiple advantages for retailers. In addition to the jump-start capital, PE investors are often actively involved in the running of the business to maximize value—identifying strategic opportunities to enhance offerings in product, technology or distribution, and moving away from unprofitable areas.

 Regardless of the turnaround source, a robust omnichannel strategy is the key to success. Omnichannel can enable retailers to reduce store inventories and employ innovative distribution strategies, such as in-store pickups, online returns and in-store orders to residences that improve customer satisfaction. Integrating innovative retailing technologies to reduce store inventories and improve customers’ in-store experience can produce significant cost savings that better enable brick-and-mortar retailers to compete.

Making operations more efficient through the use of technology and reducing the number or size of stores may help retailers better adjust to consumers’ new preferences. The transitions could be cumbersome for healthy retailers, but limited liquidity may prohibit distressed retailers from making these needed changes. As such, it is likely that we will see more store closures, bankruptcy filings and PE investment over the next six months as the state of modern retailing continues to evolve.



David Berliner is a partner with BDO Consulting. He can be reached at

Nick Weber is a research analyst with BDO Consulting. He can be reached at


BDO Spotlight: Stuart Lisle, Tax Partner with BDO UK
Brexit and the Retail Industry

Can you tell us a little more about your background?

I’ve been with the firm for 12 years, and work with a range of clients—from small startups to large corporate groups—most of which are international entities. I have worked in the retail sector both with BDO and at previous positions, so I’m very familiar with the trends and forces taking shape in the industry, including the historic Brexit vote. We have formed a Brexit task force at BDO, made up of senior partners and members of the communications, marketing and sales teams. The impetus behind the task force is to monitor what’s currently happening and how the economy is changing, and analyze for potential impacts to our clients now and over the next few years.

Have your clients seen immediate ramifications from the June 23 Brexit vote?

At first, the market went a bit haywire, but it has since recovered, and even grown. Most indices are now above where they were pre-Brexit vote. On the other hand, Sterling has taken a hit as a result of the vote, which has a direct impact on individuals and businesses. The cost of importing goods into the United Kingdom has increased, but we’re also seeing a benefit to manufacturing industries because those that are exporting out of the U.K. are able to sell goods cheaper on the world markets. There’s always a balance.

If we look at the retail sector, the industry is starting to see increases in the cost of goods but, overall, if you look at the sales results for July, it’s really interesting. With flat growth for retailers in July and declining foot traffic each week, it appears to be “doom and gloom” at first. But, if you take a closer look, online sales were up massively, with non-store performance up by 21.7 percent. That’s the strongest result in 2016 so far and its best performance since September 2015. Overall, the retail sector is still doing well, but there’s also that continuing natural movement from brick-and-mortar to online retail, a trend that was occurring pre-Brexit vote. We are also seeing positives for the luxury goods sector, as the slide in the value of the sterling is making the U.K. a very attractive location to acquire luxury goods (For example, Swiss watch imports to the U.K. have hit an all-time high).

We’re on a very long road; the exit process could take years and, in the meantime, the U.K. is still part of the single market and has the benefits of free movement of capital and people. Right now, it’s business as usual, and we’re looking for opportunities to benefit from some of the upside.

The High Court decides on legality of Brexit in October. What do you expect to see?

The U.K. prime minister has made some very clear statements of intent that she will trigger Article 50 in 2017, without being specific about when in the year this will happen. She appears determined to follow her mantra of “Brexit means Brexit” and will not look to remain in the EU by the back door. In the background, six cases have been taken to the high court challenging the prime minister’s right to invoke Article 50 and the official exit process without a parliamentary vote. These cases are due to be heard in October, ahead of the timing Mrs. May has suggested for the commencement of the Article 50 process, and therefore, there continues to be the potential for the courts to change her plans. It is interesting how she has chosen to announce her timing, which may allow the courts to change her plans, should the cases go against the government.

We could see shockwaves throughout Europe: Other countries could decide to leave the EU and there could be more financial instability across Europe than there has been in the U.K., causing the EU to change dramatically. Ministers within the major economies within the EU are very aware of the message that the wrong deal with the U.K. could give to others, and are therefore likely to push for a deal that does not see the U.K. maintain the preferred elements of membership whilst removing the parts it doesn’t like. There’s so many different scenarios that it’s difficult to know what will happen.

If the U.K. loses access to the EU single market, what would be the consequences?

The largest impact of losing access to the EU single market is import duties. At the moment, goods move throughout the EU without any import duties and, if Brexit were to occur, the U.K. will need to go into trade negotiations with individual countries and the EU. Losing the common marketplace means businesses would pay more to import goods, resulting in a cash outflow impact on businesses. The ultimate challenge really is this free movement of goods. However, if we move to the World Trade Organization standard, the duty ceiling is only about 3 percent—maybe not such a big price to pay, if one takes into account the other tax savings of operating in the U.K. compared to other EU locations.

The other important point to note is access to workforce. At the moment, there is free movement of people between the U.K. and EU member states, and there are a lot of U.K. businesses in the retail sector that hire workers from Eastern Europe. If Brexit were to occur and there were changes to its relationship with the EU, the immigration issues that could follow would put a potential stop on the free flowing workforce currently available to U.K.

There are various models that outline what a post-Brexit relationship with the EU would look like. Some of them grant access to single market but, in order to do so, the U.K. needs to accept the four pillars of the EU, including the free movement of people. This situation would look similar to today, but the U.K. would not be at the table influencing decisions of the EU. Other models provide a simple trade deal without the need to sign up to the EU pillars and, in turn, EU regulations, but without access to the single market.

For U.S. retailers with an international arm, what considerations should be top of mind?

It all depends on where the business is sourcing its goods from. For example, if the business is the U.K. arm of a U.S. retailer, and all of the goods come via the U.S. into the U.K., there will be very little difference in terms of duties. The largest issue would be a change in the exchange rates and the impact that will have on relative profitability, which could also have impact on transfer pricing. However, if the U.S. retailer is sourcing goods from Europe, it will have the same issues that U.K. retailers have in terms of import duties.

If the U.K. is no longer part of the EU, will it have implications as to whether the Transatlantic Trade and Investment Partnership (TTIP) will happen?

The U.K. would need to start negotiating trade agreements with different jurisdictions around the world. There are about 50 of those trade agreements now from which the U.K. benefits that could potentially be lost if Brexit were to occur. The question is, would the U.K. be able to have those trade agreements ready to be signed on the day that it potentially leaves the EU? Trade agreements take a long time to negotiate (5-7 years), so how could the U.K. be in a position to agree on such agreements, particularly when, under EU laws, the U.K. is prohibited from negotiating its own trade agreements? Ultimately, it’s a difficult situation with many variables that is particularly hard to predict.

Any other takeaways that you would like to share?

The most important thing we’re seeing is that businesses aren’t panicking; they are getting on with things and keeping an eye on what’s happening around them. In most cases, that means businesses are taking a lower risk approach. Transaction volumes are staying strong, company results are not overly poor, the housing market is slowing down–which makes sense, as people don’t want to put themselves in greater debt at a time of uncertainty– but the underlying business economy is in a reasonably strong position and all the indicators continue to show this.

Stuart Lisle is a senior tax partner. He can be reached at

Did you know...

According to a study by the Ponemon Institute, the average cost of holiday season cyberattacks is $8,000 per minute or nearly half-a-million dollars per hour.

eMarketer predicts the value of U.S. proximity mobile payments will triple in 2016, exceeding $27 billion. And, by 2019, U.S. consumers will spend more than $210 billion from their phones.

Seventy-six percent of retailers surveyed by the National Retail Federation say EMV was their top payment challenge of the last year.

The retail industry supports one in four American jobs, reports STORES.

The U.S. Department of Commerce says that E-commerce sales in Q2 2016 increased an estimated 15.8 percent from the second quarter of 2015.

In the News

The retail industry has been rife with breaking news and regulatory and financial developments over the past few months, and our Consumer Business practice has been on the frontlines of the media adding its perspective to the conversation.

Here’s our take on a few of the latest headlines:

Big industry moves
Walmart recently agreed to buy for $3.3 billion, the largest deal ever for an e-commerce company. The deal gives Walmart a bigger slice of the e-commerce pie.

BDO perspective: While Walmart already has an online presence, will enable it to compete with Amazon more closely. Read more about this development in E-Commerce Times.

Amazon soars
On July 28, Amazon revealed a stellar fifth straight quarter of growth. How does the e-commerce giant consistently perform so well?    

BDO perspective: Contributing factors to Amazon’s success include diversification of services and geographies, in addition to not growing for the sake of growth alone. Read more in USA Today, Retail Dive and Retail Touchpoints.

Trending millennials
The millennial generation recently surpassed baby boomers as America’s largest generation. With all that spending power, how can retailers best engage with this influential audience?

BDO perspective: There are many ways to build brand loyalty with millennials through mobile strategies including loyalty programs, social media engagement and in-store mobile integration, among others. Tune into Apparel Magazine for further insight.

The historic vote sparked global uncertainty, but are consumers feeling the ramifications?

BDO perspective: While it’s still early to determine how far-reaching the ramifications of the Brexit vote are, luxury consumers may be more tuned in to the potential effects of the decision than the average U.S. consumer. Check out Women’s Wear Daily for the full story.

Talent strategy
In June, Macy’s announced that its longtime CEO will be stepping down in March 2017 as part of a major shakeup to the company’s leadership.

BDO Perspective: With so much turnover in the retail space, the management selection process is a difficult one and should be driven by retailers’ long-term objectives. For more, read the full article in Retail Dive.

Retail M&A
Walmart’s recent acquisition of e-tailer following the Hudson’s Bay Co.-Gilt Groupe and Bed Bath & Beyond-One Kings Lane deals earlier this year highlights a trend in the retail M&A market.

BDO Perspective: Whereas private equity firms were once the biggest players in the consumer products and retail sectors, deal activity in the space is largely being driven by traditional retailers looking to build out their omnichannel capabilities by combining with online competitors. To read the full article in The Deal, click here

For more information on BDO USA’s service offerings to this industry, please contact one of the following regional practice leaders:
David Berliner
New York
  Natalie Kotlyar
New York

Paul Brocato
  Issy Kotton
Los Angeles

Jennifer Di Giovanni
Los Angeles
  Mike Metz

Randy Frischer
New York
  Rick Schreiber 

Douglas Hart
San Francisco
  Ted Vaughan