Sales Tax Discrepancy in US Retail Online Vs Brick & Mortar March, 2013
Sales Tax Discrepancy in US Retail - Online Vs Brick & Mortar Online retailers in the US have two broad advantages as compared to Brick & Mortar (B&M) retailers. One is the cost advantage and other is tax advantage. Cost advantage is due to saving on many aspects of operating a physical store (rent, electricity, staff training and compensation, renovation costs etc.), whereas tax advantage is due to a sales tax discrepancy between B&M and online retailers in US, thanks to the 1992 ruling of the US Supreme Court. 1992 ruling of the US Supreme Court… In 1992, the Supreme Court in US passed a ruling that retailers don’t have to collect sales tax in the States where they are not present physically (either through store or through warehouse, distribution hub, or fulfillment center). However, State law requires that a consumer who has purchased online or got item shipped has to declare the purchase and pay sales tax to the State. Most of the customers are not aware of it and those who are aware generally don’t declare the purchase knowing well that there is a slim chance for the State authorities to track the purchase and collect missing tax on it. As per a recent calculation by the National Conference of State Legislatures, this ‘lost tax’ has cost US $23 Bn in revenue in 2012. …resulted in added advantage to the online retailers As a B&M retailer has to include sales tax in the invoice, their quoted price of the product is generally higher than that of the online retailer’s who wouldn’t include sales tax in the invoice. Increasingly these days, it is seen that the customers visit B&M store to have a look and feel of the product (a trend often “We have a 5% to 10% price called ‘showrooming’), and then order the same product disadvantage compared with online rivals, with some customers using from an online retailer, its stores to pick products and then where it is mostly available ordering them online to avoid sales at a lower price, thanks to tax.” - Scott Mason, Vice President, Lowe’s Cos. lack of tax load. This tax discrepancy is said to result in 5%-10% price advantage for online retailers, but is hurting B&M retailers and government alike. US government sees huge tax potential from removing the sales tax discrepancy E-commerce market was negligible at the time of the 1992 Supreme Court ruling. However, favorable technological advances (internet penetration, growth in smartphone market etc.) have led to immense growth in the e-commerce market in past few years. As per US Census Bureau, E-commerce accounted for 5.2% of the overall retail market ($4.4 Tn) in the US in 2012. As per an estimate by Forrester, E-commerce market is further estimated to reach $327 Bn by Sales Tax Discrepancy in US Retail - Online Vs Brick & Mortar
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2016. This expected growth in the e-commerce market will keep mounting the ‘lost tax’ revenue potential of the US government with every passing year. With an aim to increase tax revenue and also to provide a level playing ground to online and brick and mortar retail outlets, Republican and Democratic lawmakers in US reintroduced legislation that could force online retailers to collect sales taxes, thus favouring the brick and mortar stores in the process. The online retailers are expected to collect the tax at the time of sale (the incidence at which the tax is levied), and pay the same to the state governments. The rate of tax differs for various states, but is typically in the range of 5-10%. Reaction from the retailers
“eBay Inc. opposes raising taxes on the Internet or its users, as well as any attempt to impose Internet sales tax collection burdens on the small businesses who can least afford it. This is certainly not the time to impose a major new tax burden on Internet vendors working to implement successful new business models.”- on eBay’s website Although the legislation is considering exemption for e-tailers registering $500,000 or $1,000,000 in annual sales, eBay considers this to be too small a number. “We believe that putting a tax burden on small businesses and treating them the same as giant retailers is unfair. This would add a new cost.” - Brian Bieron, Senior Director for Federal Government Affairs, eBay
“The rules today don’t allow brick-andmortar retailers to compete evenly with online retailers, and that needs to be addressed." - Raul Vazquez, Executive VP of global e-commerce, Walmart
“We feel like any sale should be treated the same, whether it is made in a store or from a coach on a laptop.” - Laura Leigh Goins, VP of communications and member relations, Kentucky Retail Federation
As was the case with most online retailers, Amazon.com also showed reluctance to collect sales tax, potentially losing the price differentia that it enjoyed over the years. However, it has been under pressure from the government for a long time to collect sales tax and now has started collecting sales tax from the customers in the States where it has some physical presence or is planning to have some physical presence, mostly in the form of warehouse and distribution centers. Currently, Amazon is collecting sales tax in 9 States of the US which will increase to 16 States by next year. It is believed that while B&M retailers will have to explore options to compete with the operational cost advantage that the online retailers enjoy, removing sales tax discrepancy will provide a much needed respite to the B&M retailers, atleast for now. Source: All data from Secondary Research; Sutherland Analysis
Sales Tax Discrepancy in US Retail - Online Vs Brick & Mortar
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