Government Affairs Report – August 2018
“Change. Isn’t it appropriate that the Chinese word for it is comprised of two symbols—one for danger and another for opportunity? How you perceive and adapt to change makes all the difference.” – Spinditty Blog
Just like everything else in this world, the commercial real estate industry is constantly changing. Trends come and go, prices go up and down, there are boom years and bust years. As we near the fourth quarter of 2018, one of the most interesting trends has been that of the retail market. With the continued proliferation of online retailers, many consumers would simply rather order their goods from the comfort of their couch, in their pajamas. As we watch brick and mortar establishments shut their doors, downsize, or file for bankruptcy, how does the industry adapt?
At the end of 2017, retail was struggling with the closures of stores like K-Mart, JC Penney, Macy’s, and Sears. In the beginning of 2018, the predictions came in that there would be more, Banana Republic, Gap, and Teavanna to name a few, along with more bankruptcies. Businesses that had been around for decades simply could not keep up with the online trends in shopping. So what are we seeing in 2018 in response to this change in the market? Industrial space is now of critical importance, as the need for warehouses and distribution centers grows nationwide. In Las Vegas alone in 2017, we saw the industrial vacancy rate drop to 4.4%, according to a Nevada Independent Article; 4.6% nationwide. In both northern and southern Nevada we are seeing large amounts of development with respect to distribution centers; Amazon, Sephora, Fanatics, Walmart and Bed Bath & Beyond building or announcing plans for distribution centers in North Las Vegas and Polaris announcing plans for its new distribution center in Fernley. That is not to say retail is dead. Nevada has enjoyed reduced vacancy rates statewide with smaller retailers coming into the market or expanding their markets. Sprouts, Marshall’s Home Goods, Las Vegas Athletic Clubs, At Home, and Seafood City to name a few. According to an ICSC article, Logic Commercial Real Estate reported vacancy at just 9.2% in the Greater Las Vegas Valley.
As we finish out 2018 and start looking at 2019 trends, one thing seems clear, the need for industrial space is not going anywhere. Identifying the needs of online retailers, build-to-suit spaces, Nevada’s lower tax structure, and business friendly climate will aid in our continued success as a state in this area. We continue to face the challenges of land availability and infrastructure needs, but with strong economic development drivers and NAIOP’s keen interest in moving the needle with the federal lands bill, we have set ourselves up for success. As far as the retail side of things, with vacancies continuing to drop, finding the right tenants becomes a priority, with smaller retail being at the forefront, instead of the large retailers who struggle to compete in the age of online shopping.
When contemplating this industrial and retail trend, we’d be remiss in leaving out the latest Supreme Court decision, South Dakota v. Wayfair. The opinion makes several references to the substantial policy considerations supporting taxation of online sales. Notably, the Court stated:
According to respondents, it is unfair to stymie their tax-free solicitation of customers, but there is nothing unfair about requiring companies that avail themselves of the States’ benefits to bear an equal share of the burden of tax collection. Fairness dictates quite the opposite result. Helping respondents’ customers evade a lawful tax unfairly shifts to those consumers who buy from their competitors with a physical presence that satisfies Quill—even one warehouse or one salesperson—an increased share of the taxes. It is essential to public confidence in the tax system that the Court avoid creating inequitable exceptions. This is also essential to the confidence placed in this Court’s Commerce Clause decisions. Yet the physical presence rule undermines that necessary confidence by giving some online retailers an arbitrary advantage over their competitors who collect state sales taxes.
In the name of federalism and free markets, Quill does harm to both. The physical presence rule it defines has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field (Emphasis added).
The Court continued, noting the “physical presence rule” allows a de facto competitive advantage for out-of-state retailers, and effectively encourages local brick & mortar businesses to shut their doors. As such, the “physical presence rule” has a significant adverse effect on commercial real estate:
Worse still, the rule produces an incentive to avoid physical presence in multiple States. Distortions caused by the desire of businesses to avoid tax collection mean that the market may currently lack storefronts, distribution points, and employment centers that otherwise would be efficient or desirable</U. The Commerce Clause must not prefer interstate commerce only to the point where a merchant physically crosses state borders. Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents (Emphasis added).
The Wayfair decision does not provide an immediate fix, and taxation of online sales could take some time to implement. Statutes allowing for assessment, collection, and remittance of online sales will take a while for some states, and may be right around the corner for others, depending on what the tax laws in the respective states say. The Wayfair opinion interpreted a South Dakota law, and they remanded the matter back to South Dakota. That said, the Court liked South Dakota’s law because it was specifically tailored by the South Dakota legislature to meet the Supreme Court’s substantial nexus test; it is limited to out-of-state businesses which do in excess of $100,000 in revenue, or more than 200 transactions in the state. If a state has laws on the books which are close to the South Dakota law and regulations in place to administrate it, that state could implement the tax quickly. Other states could have to wait for their legislatures to pass a bill (most are adjourned). Still others may try to get it done at the regulatory level.
All that said, what we can predict is this: it is highly likely the state laws, once in place, will look very similar to the South Dakota law.
We also anticipate online retailers will run (sprint) to Congress, in an attempt to temper the blow (estimates are the Wayfair opinion will result in ~$8-33 billion in found money for state and local governments). In fact, eBay has already blasted an email to its users requesting they sign a petition “for Congress to act on legislation that protects small businesses.” Congress may be sympathetic, or they may not. However, immediately following issuance of the opinion, the President celebrated the Wayfair decision over Twitter. So, whether Congress can get tempering language passed and signed by the President is a significant question. More details will surface as the dust settles in the aftermath of Wayfair, and legislatures nationwide evaluate this revenue opportunity.
Jonathan P. Leleu, Director
Kerrie Kramer, Government Affairs Analyst
Fennemore Craig
jleleu@fclaw.com | kkramer@fclaw.com | T: 702.692.8037