By Garrick Brown, research director, Terranomics
Probably the most important bit of news for bricks-and-mortar retailers that broke over the past week is that the Senate voted to move forward with the Marketplace Fairness Act. This is legislation that was sponsored by the International Council of Shopping Centers (ICSC) and that was sponsored in the Senate by a bipartisan group led by both Republicans and Democrats. The bill simply closes a loophole that has existed ever since the rise of the internet in terms of the collection of state sales taxes.
Under the current system, consumers in most states are responsible for paying state sales taxes on items that they purchase through the internet. However, because a collection mechanism was never put in place, almost none of these sales tax revenues are ever collected. The consumer is responsible for declaring these and voluntarily paying these which, of course, they don’t. The implications are different depending upon the state. After all, some states have no sales tax and in some cases, e-commerce players are charging local sales tax depending upon their circumstance).
Let me give you an example. I live in California and have a local sales tax of roughly 8%. If I were to go into Best Buy and purchase a $1,000 big screen television, I would be looking at an additional $80 in sales taxes. However, were I to shop around on the Internet and found the same television at the same price, there is a very good chance (depending on the e-commerce retailer) that I could purchase that same item and not be charged for the local sales tax. Now let’s make this clear — under my local state law I am responsible for paying that tax. But because there is no collection apparatus in place on the retailer side of the transaction it is up to me to voluntarily declare that purchase and pay those taxes on my annual income taxes. Do you think I will? If you guessed no, you are probably right. In fact, the estimate is that roughly $28 billion in sales tax revenues go uncollected because of this loophole.
But let’s look at the impact of this loophole. In essence, e-commerce retailers are given a pricing advantage of anywhere from 5% to 10% (depending upon the state involved) over their bricks-and-mortar competitors. And keep in mind that e-commerce players already have a huge edge built into the system simply because they face nowhere near the same levels of overhead as bricks-and-mortar stores. They pay nowhere near the overhead of bricks-and-mortar players in terms of rents (they use warehouse space instead of much pricier retail square footage). They generally have lower shipping costs (their goods are usually coming out of one central mega distribution warehouse whereas the television in the store likely passed through a couple of staging areas before landing in my local Best Buy). And they have nowhere near the level of overhead when it comes to employees (a bulk e-commerce distribution center may employ 1,000 workers to cover the entire Western region of the country, whereas bricks-and-mortar employees for a company like Best Buy across such a region will easily five to six times that). The fact is that e-commerce players already have a considerable edge. That $1,000 television at Best Buy likely is already being priced at $850 to $900 at most by their e-commerce competitor. Against this backdrop, is it any mystery why e-commerce retail is exploding while we are seeing contraction from so many sectors of retail?
The fact is that this is killing some categories of retail (big surprise that consumer electronics is one of the sectors feeling the pinch most). Without the extra advantage that this loophole gives e-commerce players, bricks-and-mortar players still have a challenging road ahead. But this extra advantage was never meant to be there and was only created because our legislators never had the foresight to address closing the loophole on the issue of actual sales tax collection. The passage of the Main Street Fairness Act will slow the erosion of bricks-and-mortar retail. It will save jobs. It will help bricks-and-mortar retailers, and especially small retail businesses, compete on a more balanced footing with e-commerce. It will collect revenues for the states that are currently unable to collect these revenues and likely alleviate pressure at that level to raise other taxes to deal with local deficits. And it will only have a minimal impact on the e-commerce players that it impacts because they still have an overwhelming pricing advantage over bricks-and-mortar retailers.
This bill was sponsored by the ICSC — hardly a left leaning, pro tax and spend group, but a lobby that typically is linked to Republican pro-business causes and that receives most of its backing from retailers, developers and shopping center owners. This bill has the support of most of the major retailers active in the marketplace today; ranging from Walmart to Target and nearly every other major chain. This bill was even endorsed by Amazon in February, the single e-commerce player that arguably has the most to lose by its passage.
The passage of this bill should be a no-brainer. It is one of the few issues that people on both sides of the aisles can agree upon. It is pro-business, pro-jobs and pro-fiscal responsibility in that it collects unpaid revenues that are due and will ultimately lead to less taxing pressures at the state level. But here is the catch: Last Monday, the White House endorsed the bill. This is something one would expect for common sense legislation sponsored by senators of both parties. But ever since then, there has been increasing talk from tea party Republicans in the House of Representatives of either blocking this legislation or proposing some sort of counter legislation that will essentially render it ineffective.
Since President Obama’s endorsement, a number of AM talk show hosts have entered the fray, generally misrepresenting the bill as a new tax and then denouncing it as yet another attempt by tax-and-spend nanny state socialists looking to redistribute wealth to the moocher class. And, of course, this bill has always been opposed by Grover Norquist and his quasi-libertarian Americans for Tax Reform lobby. They too have been eager to brand it as a new tax that is diametrically opposed to their philosophy that the only way to get smaller government is to starve all government — regardless of the situation or circumstance. Obviously some see merit in those arguments and to those of you who do, we will just have to agree to disagree. And I am not completely willing to dismiss the increasing wave of opposition as merely being kneejerk dysfunctional politics, though I can’t help but wonder if any of this would have happened had the President not opined on the subject. Instead, what I find most disturbing are the distortions of what this bill is, what it will do and even who is for it. The world’s largest retail chains, the ICSC, the development community, institutional real estate owners and the commercial real estate industry in general are hardly a bunch of extreme left, Weather Underground loving Berkeley hippie radicals. I vaguely remember a day in this country when legislation like this would have been viewed as having an overwhelming pro-business and pro-jobs stance. Regardless, I still maintain that this is one bill that should be a no-brainer for representatives on both sides of the aisle. And it is, for most of our representatives (it is still only a small, but vocal, minority that is talking about trying to block it). This bill will save jobs, help the overwhelming majority of retail businesses (especially small business) and, yes, bring in some much needed revenues to the states that they should have been collecting all along while erasing an unfair trade advantage that is currently in place. If one’s opposition to this legislation is solely based upon that last point of being anti-revenue in all cases, they should at least consider the impact of doing nothing on jobs and the retail landscape in general.
All this being said, I am hoping that cooler heads will prevail once this bill reaches the House of Representatives and I am optimistic that it will pass. The overwhelming majority of my subscribers are active in retail real estate, and I know that most of you are in favor of this legislation. But it is imperative that you voice this support to your local representative. Don’t let this common sense bill become the victim of Washington’s ongoing dysfunctional gridlock.