Is Sales Tax Dodging Responsible for the Death of Brick-and-Mortar?
Online retail has become a huge disruptor for traditional brick-and-mortar stores. The retail industry overall has experienced massive changes within the last 15 years, not least of which is the growing number of sales being handled online. Amazon in particular has become a major force, with their success achieved in part by utilizing a variety of tax loopholes. Unless an online retailer has a physical presence in a particular state, they do not pay sales tax on transactions with residents of that state. This tax loophole was estimated to cost states $23.3 billion in 2012, according to the National Conference of State Legislatures. This means that sites like Amazon, eBay, and other large online retailers are able to offer shopping free of any sales tax. This is a big draw for customers, whereas brick-and-mortar retailers must collect sales tax, leaving them at a disadvantage. Many feel that the decline of brick-and-mortar stores is a direct result of the rise of online shopping, and the ability of the online retailers to undercut them.
This strategy, adopted by other online retailers, has led to predominantly brick-and-mortar retailers like Borders and Circuit City going bankrupt, and many others falling in their wake. Sears Holding Corp recently announced they will close more than 150 Sears and Kmart locations. JC Penney’s announced the closing of 138 stores, Macy’s announced it will close 68 stores, and the Limited is closing all of its retail locations.
Business owners and state and local governments are beginning to broaden their support for legislation requiring the collection of online sales tax. These tax loopholes have led to millions of dollars in lost tax revenue, and municipalities are struggling with how to address this. In 2013, the Marketplace Fairness Act was introduced, which grants states the authority to compel online retailers to collect sales tax at the time of the transaction. It also establishes a system for collecting these sales taxes. Among other mandates, this involves designating a state organization to handle sales tax filings and providing free software to establish where a purchaser lives, to be able to charge them local sales tax. The bill was passed in the U.S. Senate in 2013 but did not go to a vote when it reached the House of Representatives.
Other legislation has been proposed and discussed, including one that would charge sales tax based on the location of the seller, but nothing has yet been passed at the Federal level. Some states have tried to pass their own requirements – in March 2016, South Dakota passed a law to charge out-of-state sales tax to online retailers, but that is being taken to court because it conflicts with the current Federal law. There is also a lawsuit against Alabama for its rule passed in 2016 requiring that all retailers who sell more than $250,000 annually must collect sales tax, regardless of whether the retailer has a physical presence in Alabama.
Amazon has begun to collect sales tax in states that have enacted laws which require online retailers to collect tax where they have a physical presence. Starting on April 1, 2017, Amazon has begun collecting sales tax in the last states they were not previously collecting: Hawaii, New Mexico, Maine, and Idaho. Originally Amazon had fought against collecting sales tax on online purchases, but as it has shifted its strategy and is now creating a network of distribution centers across the country, this has resulted in Amazon collecting local sales tax in more states. Now Amazon say they are in support of legislation to require sales taxes to be collected from online retailers. However, Amazon shoppers still do not have to pay sales tax when they buy from 3rd party vendors on Amazon, which is a huge part of their online sales, estimated at $10 billion annually.
One estimate is that Amazon has saved approximately $760 million between 2005-2014 utilizing this sales tax loophole, which was equal to 17% of the company’s global profits during that time. That savings has helped them to fuel their rapid expansion. Amazon originally started out building large distribution centers in states that were not as populated. By doing so, they dodged higher sales taxes. They then shifted their strategy to cut deals with state legislatures to avoid sales taxes and worked with local governments on reducing property taxes. In many states, they were able to achieve sales tax exemptions and postponements, among other tax breaks.
Amazon is by no means the only online retailer to take advantage of these loopholes. When large online retailers use these strategies to dodge paying sales taxes, that revenue is a significant loss to municipalities, who cannot pay for the services they need to provide. Towns and cities then raise real estate taxes and other local taxes to compensate. The rise of real estate taxes combined with the loss of sales revenue has been a huge hit to brick-and-mortar retailers. These combined factors have resulted in massive closures, and have left millions of feet of retail space vacant along Main Streets in America.
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