DTC Brands — How Data Fluency Enabled a Digital Disruption

My small apartment building’s lobby is a testament to these changing behaviors — there’s barely any room for the incoming DTC brands and related subscription economy shipments, daily. UPS, Amazon, FedEx and USPS — and their contractor networks — are delivering the goods that pile up. No drones just yet.

One of the entrepreneurial wonders of the 21st Century economy is actually not a very new concept at all. Direct-to-the-consumer (DTC) brands have been around since the first mail-order catalogues. Names such as LLBean, Orvis and Lands’ End revolutionized remote selling, as they understood the power of data and measurement in building these enterprises, by earning customer loyalty through superior products and customer service, and generating lifetime value.

So perhaps it’s only natural that in an increasingly digital, social and mobile world where data enables such direct connections more fluidly and products can be personalized at-scale DTC startups would come to be powerful brands in their own right. Bonobos, Casper and hundreds of others are rising to disrupt consumption and create new patterns of consumer behavior for even the most everyday product. Just this week, Rent the Runway officially became the newest unicorn in the venture capital investment world.

My small apartment building’s lobby is a testament to these changing behaviors there’s barely any room for the incoming DTC and related subscription economy shipments, daily. UPS, Amazon, FedEx and USPS  and their contractor networks  are delivering the goods that pile up. No drones just yet.

If You Can’t Beat Them …

Most retailers today report that their biggest threat comes from DTC brands (see Figure 1). Yes, Amazon and private labels also are leading concerns … but the truth is that building a business with seamless data flows enables the customer, and not the product, to be front-and-center. Brands that embrace customer-centricity, and have the customer data directly, cull the benefits.

Figure 1.

DTC brands
Credit: eMarketer, 2019. Used with Permission.

When database marketing and customer relationship management came of age, we knew that pesky problems such as data silos, legacy systems, senior executive buy-in and lack of data bench strength were crippling. Where entrepreneurs love data and have great products and service, those hurdles don’t exist.

No wonder traditional brands are quickly starting up or buying their own DTC brands and relationships. There’s power in data, and having first-party data relationships with consumers even as third-party data, and perhaps a few social influencers, enable discovery and facilitate connection – has brought about the mail-order bonanza of the digital age.

Physical retailers are not powerless in this mix after all, point-of-sale transactions still rule, and hybrids are flourishing (online to offline, buy online pick up in store). It’s how quickly these stores can integrate POS and transaction data with other forms of advertising data, and even serve as data-sharing coops with the brands they carry, to serve customers better. It’s about more relevance and more personalization. We haven’t heard the last roar from Main Street, Big Box and shopping malls. They’ll need to tap data’s power in similar fashion to go back on offense.

Did the SCOTUS Tax Ruling Nullify ‘Physical Presence’ as a Nexus Standard?

The recent SCOTUS tax ruling may have effectively removed “physical presence” for e-commerce retailers as a nexus standard for collecting and remitting sales and use taxes. This may potentially eliminate one of the most important protections on out-of-state businesses regarding interstate commerce of the past half century.

This is not a legal commentary on the SCOTUS tax ruling, but it may be one of legal remorse where taxation is concerned.

In one of his last acts as a U.S. Supreme Court Justice, Justice Anthony Kennedy undid the clock 51 years in South Dakota v. Wayfair, (opens as a PDF) and authored a 5-4 decision that may have effectively removed “physical presence”  for e-commerce retailers as a nexus standard for collecting and remitting sales and use taxes. This may potentially eliminate one of the most important protections on out-of-state businesses regarding interstate commerce of the past half century.

Why the uncertainty about the SCOTUS tax ruling? Because the court remanded the decision to South Dakota, where the lower court may make further modifications.

What of Taxation Without Representation?

We fought and won a Revolution on taxation without representation, but such tyranny may not seem to count for much where e-commerce is concerned. The National Bellas Hess (1967) and Quill (1992) decisions set and reaffirmed the “physical presence” test that blocked tax collection-and-remittance duties of out-of-state catalog and mail order companies, and their e-commerce offspring. Suddenly, this may no longer provide adequate protection.

The American Catalog Mailers Association identifies many open questions left in this decision’s wake,. Yes, it may have to fall to Congress and a new federal law to sort this all out.

Some tax-hungry states have called this “leveling the playing field.” Hardly. Name me a Main Street retailer who collects and remits taxes for thousands of state and local tax jurisdictions where there is no presence. Yet out-of-state companies, many of them small startups, may have to do just that. And we know how tempting it is to throw tax burdens on outsiders – knowing there are next-to-zero ramifications for doing so. Tyranny.

E-commerce firms today happily collect and remit taxes for jurisdictions where they have a physical presence. They receive a multitude of government services, and they have elected voice through direct representation in those governments. Every e-commerce firm in every state currently collects such taxes from in-state residents. So now we are really going to abandon this wise rationale for distributing tax collection burdens?

Other out-of-state businesses may make a business decision to collect and remit such taxes in states where they are not located. They may anticipate business growth or supply chain relationships that may extend to those other states. Yet, that is a decision as a business – not one mandated by a far-away government or a group of justices bending with the wind.

Interstate Commerce: Ladies and Gentlemen, Watch Your Wallets

As consumers, yes, we are currently responsible for self-reporting our out-of-state purchases, subject to sales taxes, and paying these taxes ourselves where we reside. We are supposed to do this through our state income tax form filing each year. (Interestingly, nearly 90% of business-to-business transactions are compliant, ACMA reported.)

So get ready to open your wallets, because if you haven’t been paying those taxes yourselves now – an e-commerce (and catalog) company may be forced to play state and local tax collector far beyond Hometown, USA. For those businesses in e-commerce, please stay tuned: The focus may turn to the legislative sector and lobbying for relief. In the meantime, it might be prudent to start researching tax collection software, while also devising creative and new non-nexus theories, because taxation without representation doesn’t appear to be one of them anymore.