Over the last couple years the online sales tax and use tax debate has gotten larger with many larger companies trying to change the tax structure that will fundamentally hurt small retailers, both online and offline. These changes will cement the positions of these large companies in multiple ways. This includes not only large retailers such as Best Buy and Walmart, but companies such as Amazon.com.
Why people shop online
First, let’s understand why people shop online. Regardless of what you may hear, it has less to do with saving a ton of money and more to do with convenience and selection.
I have always been one to support local businesses. But over the last ten years I have switched to buying many things online because of the convenience. The best example is at Christmas time. I buy all my presents online and have them shipped directly to my family’s house so I don’t have to travel with presents. With people working more hours, demands of family and friends, knowing I can order something and pick it up at my door or in the mail box makes my life easier.
By its very nature, online stores should have a larger selection of products than a local store, including the big box stores. It is as simple as square footage and shelf space. With cheap online storage, showcasing thousands of products online is a no-brainer. Add to that by finding a specialty store, I can find hard to find or unique items.
Why people shop in a store
If people only were trying to save money, then gas station convenience stores, Walgreens and CVS should have failed because of their limited selection and generally higher prices. If you are on long term medication you tend to fulfill it online or by mailorder but if you need antibiotics you go to the local pharmacy. Certain people also don’t want to wait. Those types of people will always shop locally.
Need to touch
One of the many reasons Dell and Gateway fumbled on the consumer side was due to the switch over to laptops from desktops. The need to touch and feel the product before buying killed the direct to consumer movement for many high ticket items. I would never buy a couch without sitting in it. But a replacement mouse I will always buy online.
All things being equal
All things being equal, you don’t necessarily save money buying online versus buying in store. I do a lot of shopping at Crutchfield.com even though they are never the cheapest but have fantastic customer service. Most manufacturers enforce MAP (minimum advertised pricing) on their retailers making it impossible to advertise for less online than in store. In fact, large retailers have an advantage because they can get either MAP exemptions or help with advertising from the manufacturer directly.
Hypocrisy of National Retailers
National Retailers have great PR people that can spin things to their advantage. They talk about the disadvantage they have but they seem to forget some of the substantial advantages they have over small stores of every kind.
Taxes retailers don’t pay
Large retailers are very good at avoiding their tax obligations that gives them substantial advantage over small retailers. Most people don’t realize that most large national retailers negotiate property tax exemptions for their stores. So that 100,000 square foot store Walmart built, had turn lanes and signals put in at your expense, won’t be paying any property tax for 20 to 30 years.
Sales Tax avoidance on large ticket items
When the CEO of that large corporation flies to Washington to advocate sales taxes being levied on online or catalog transactions, he will most likely be flying on a 40 – 50 million dollar private jet. Guess what percentage of those companies paid sales tax on that corporate jet when they bought it? If it greater than zero, I would be surprised. Companies always seem to have business in a state that does not charge sales tax when they take delivery of their new aircraft.
Does sales tax really matter?
The story is, people shop online because of the cost savings from sales tax. This might apply on some large ticket items, but these large national retailers never bring out the proof. There is a simple way to measure it as well. Cart abandonment. If sales tax really mattered, there should be a huge percentage of orders abandoned after sales tax is calculated in the cart. My own experience has shown a 0% abandonment rate due to sales tax. If I have products people want, or a compelling price, they aren’t going to waste their time looking for a better deal to save $1.50.
What does sales tax pay for?
Sales tax is just another revenue source for state and local government including Property tax, business and income tax, fines and other revenue sources. They pay for things like social services, fire, police and the local courts. As an out of state retailer, the only resources we use are roads which are already paid for with tolls, gas taxes and funding from the federal government that comes out of our income taxes.
Is calculating sales tax that much of a burden?
I love the arm chair CEO’s who say how easy it is to pay sales tax in multiple jurisdictions. In reality it is a huge burden for small businesses. Just doing sales tax filings in one jurisdiction on my small sales takes almost 6 – 8 hours as I pull from multiple revenue sources, figure out what sales are exempt and try and fill out the poorly documented forms each state provides.
If sales tax was so easy, then large organizations would have no need to hire entire departments to handle sales tax filings. I worked for one major Fortune 500 company that had very little nexus in outside states yet employed three people doing nothing but sales tax filings. I can spend my days doing sales tax filings or doing marketing. I can’t do both.
What can small business do?
I know many small retailers are worried about losing their sales to online retailers. The simplest solution is to open your own online store. It is so simple these days to start your own online store. You have a distinct advantage with established relationships with your suppliers, access to fully functional platforms and a ready built customer base. This also allows you to work with your suppliers to drop ship a variety of items you might not carry in store. If you need help we can help with our affordable service (Online Store Help).
Talk to your state representative to make it illegal to give large retailers property tax exemptions. The idea that we have to give exemptions to large retailers is silly. But it can’t be done at the local level since the retailers are very good at playing municipalities off against each other forcing a local cities and counties to provide property tax relief so the city next to it doesn’t get the store. At the very least there should be a clawback provision in these cases where the retailer lays off or closes those stores during the property exemption period.
Who wins and who loses?
Stay tuned for our next article that talks about who wins and loses if Amazon and the large national retailers get their way. You might be surprised why Amazon is forcing the sales tax debate…