The Writing on the Wall

by Andy Ellen

Never before have there been more options for consumers in choosing how, when and where they shop. We live in a global marketplace. If I want to buy a new pair of shoes I have a multitude of choices where to shop. I can drive to my local mall, or visit the specialty shoe store just around the corner from my house. I can go online and type into the search engine the exact type and size shoe that I am seeking and will have shoe sellers around the world provide me pricing and pictures within seconds. For the retail industry, this global marketplace is the new reality.

Five years ago online retail sales were $175 billion. By comparison in 2012, U.S. e-commerce sales amounted to $289 billion dollars, a 65% increase.  According to eMarketer estimates, online retail revenue in the United States will reach $361.9 billion dollars in 2016. Simultaneously, the number of U.S. digital shoppers is expected to grow from 137 million in 2010 to 175 million in 2016.

With the ever-increasing technology that is putting the world in the hands of shoppers, the retail industry is spending a significant amount of time talking about the multichannel experience – which simply means making products available to customers where they are – in-store, online, mobile phone, tablet, etc. Retailers of all sizes know they need to adapt to survive.

But for too long the elephant in the room has been the fact that online-only retailers have a price advantage - in some states it can be as much as a 10 percent – because they are not required to collect and remit sales tax from their customers. Under U.S. Supreme Court decisions dating to 1967 and 1992, out-of-state retailers have been shielded from state sales tax collection due to concerns about impeding interstate commerce.

The Marketplace Fairness Act (S. 743) is a stand-alone bill in the U.S. Senate that would allow states the authority to require sales tax to be collected and remitted on every sale regardless of where the sale occurred. S. 743 gives states the power to require online-only retailers to collect the state sales tax due on sales made. On April 22, the Senate voted 74 to 20 to bring the legislation to the floor for debate; the retail industry is deeply appreciative of the bi-partisan support this bill has received from Senators Richard Burr and Kay Hagan.

Opponents to the legislation argue that this legislation is being pushed by “big retail” and that small businesses and consumers have a lot to lose. In fact, one of the largest opponents to this legislation is ebay who has gone as far as sending an e-mail to 40 million ebay users saying that they are fighting this to ensure healthy competition, value and selection that benefit online consumers.

What is being left out of ebay and other opponents’ arguments is that all brick and mortar (i.e. Main Street) retailers, both large and small, are required to collect and remit sales tax. All consumers are required to remit this same tax for online shopping (called a use tax on your tax return) though few seldom do. Folks, this is not a new tax. This legislation is simply bringing tax laws into the 21^st century and leveling the playing field for those businesses who have a physical presence in a state and those who do not but choose to sell across state lines.

For state governments that collect sales tax (45 out of 50) the move to online shopping across state lines has led to significant drops in tax-generated revenue. North Carolina lost in excess of $436.5 million in sales tax from internet purchases by North Carolina residents.  These uncollected funds can be used to assist in tax reform and lowering everyone's taxes, Medicaid reform or for public education.

There are those who argue that sales tax is a bad idea, but until there is no sales tax in the state of North Carolina, the retail businesses in our state -  who employ citizens in their communities, pay property taxes, fund little league teams and PTA fundraisers  - deserve a fair shake when it comes to competing with online retailers.

Another argument circulating is that requiring small businesses to collect and remit sales tax in numerous states will drive the cost of doing business so high that they will be forced to close their doors (no pun intended).

This is simply not true. The technology has been in place for several years now that will calculate the sales tax at the point of sale for the consumer. And states who have gone through the streamlined sales tax process (North Carolina is one of these) have simplified the process for remitting sales taxes to the state.

By giving online sellers an automatic 5 to 10 percent head start, it's virtually impossible for a Main Street retailer to compete on price. Internet companies having a 6.75 percent sales tax advantage in North Carolina is like Duke starting out the UNC football game with a touchdown lead. Even if they have the lower price, the sales tax loophole often makes the online retailer the winner.  In a free market economy, that sort of special treatment is just wrong.

Brick and mortar retailers have seen the writing on the wall and are addressing their need to adapt and compete in a rapidly changing marketplace. Now it’s time for online-only retailers to see the writing on the wall and realize that it’s time to play fair when it comes to sales tax.

Andy Ellen is President and General Counsel of the NC Retail Merchants Association