Sales Tax is the Cost of Running a Local Business

May 14

Written by: John Sciacca
5/14/2014 11:47 AM  RssIcon


“Once is happenstance. Twice is coincidence. Three times, it's enemy action.” – Ian Fleming, “Goldfinger”


Remember in the early, Wild West days of the internet when we used to counter the specter of online retailing with the ominous threats of getting ripped off, receiving the wrong product, or being stuck with some grey-market or broken goods that could never be returned? Yeah. Not so much anymore.

Today people love buying off the web. In fact, Amazon is now probably one of most trusted business partners. And, we’ve adjusted our strategies to account for this, realizing that we are often going to be competing against some faceless warehouse 3,000 miles away whose only goal is to move boxes and is totally content to make low single-digit profit margins.

Recently, however, I had three separate encounters within a 24-hour period (thus, my opening quote), that made me aware of an issue that has probably cost you and I more business than we care to know: sales tax.

I had three gentlemen come in to discuss different system options last week, and when I followed up with proposals, two of them said that while my price was the same as Amazon, they were going to buy from the internet because they would save the 6 percent sales tax (our local rate). If I wanted to not charge them sales tax–or discount the sale an equivalent amount–they would love to buy from me, but, otherwise… (One of the guys then asked if I could research a receiver for him, prompting me to reply, “How much of my time do you expect me to invest in something that you’ve already said you are going to buy somewhere else?” He seemed genuinely perplexed.)

The third gentleman asked how much he would save if he paid us in cash. When I explained that we actually preferred not to get large cash payments, and that the price was the same either way, he explained that when he gets paid in cash, brother, that money goes straight into his pocket. I explained that my business partner and I have had a policy since day one that we were always going to do the right and honest thing, and that we felt it would always pay off in the long run. He looked at me like I had suddenly grown a third eye.
 


The big online, non-tax-collecting elephant in the room is Amazon. It turns out that Amazon only has to collect sales tax in 21 states: Arizona, California, Connecticut, Florida, Georgia, Indiana, Kansas, Kentucky, Massachusetts, Nevada, New Jersey, New York, North Carolina, North Dakota, Pennsylvania, Tennessee, Texas, Virginia, Washington, West Virginia, Wisconsin. And many of those states have had to fight–or are still fighting–with Amazon to get the estimated hundreds of millions of dollars in lost revenue.

Even so, it isn’t just Amazon that you are competing against. A visit through the terms and conditions at sony.com had the message, “Except for products shipping to Mexico, prices do not include any sales, local, or other similar taxes.” Since you can order pretty much any product that Sony offers–Flagship 4K projector or UHDTV? New hi-rez audio player? Yep—that could be a pretty fair “discount” that you now potentially have to compete against.

Now, technically, when someone purchases something from out of state via mail order, catalog, or e-commerce, they are supposed to pay a use tax for those goods, usually an amount that corresponds with the state’s sales tax. I say “supposed to” because in reality it is unlikely even a small percentage of buyers actually does so.

To combat this, various bits of legislation have been introduced, called “Amazon tax,” designed to compel Amazon—and similar online e-tailers–to collect local sales and use taxes from customers. I looked at the legislation that has been put through in my own state and in brief it said that in exchange for opening a local distribution center that would employ 2,000 people, Amazon would be given an exemption on collecting sales tax until 2016. But, in their largesse (please read with maximum sarcasm), Amazon has “agreed to notify South Carolina customers by email that sales tax was owed on their purchases but that shoppers would still be responsible for paying the tax by themselves.” How gracious of them.

The irony is that I’ve often used the sales tax angle to my advantage locally. Our store is located just over a county line, meaning we aren’t required to collect a variety of tourism taxes and other local taxes that our neighbors to the north–Best Buy, Costco, Wal-Mart, HH Gregg–must, making their tax rate 9 percent.

Look, I’m no martyr, and if sales tax went away tomorrow, I’d be personally happy to stop paying it. But until that happens sales tax is a legal cost of doing business and an important source of revenue for the states that collect it. These taxes fund a variety of things, including education, health care, transportation, corrections, and low-income assistance. Even if you don’t have kids in school or get government aid, I’m guessing you use the roads and are happy that bad guys aren’t roaming the streets.

Turns out that internet sales tax skullduggery is a pretty massive deal. According to Wikipedia, “As e-commerce sales have grown in recent years, noncompliance with use tax has had a growing impact on state revenues. The Congressional Budget Office estimated that uncollected use taxes on remote sales in 2003 could be as high as $20.4 billion. Uncollected use tax on remote sales was projected to run as high as $54.8 billion for 2011. I’m betting it was higher than that.

Still, we persevere because many of our customers want the service, support, knowledge, and education that comes with dealing with trained professionals. And they are willing to pay a bit more for the privilege. In fact, a recent CEA study, “Millennials: The New Face of Retail,” claims that a majority of people like to come and experience a product prior to purchase, while a minority are actually browsing pricing online while doing so. So, that’s good.
 


Even still, it would be nice if we were all playing on a level field and if we “local guys” didn’t have to start each encounter 6 percent–or more–in the hole.

John Sciacca is principal of Custom Theater and Audio in Myrtle Beach, SC.
 

18 comment(s) so far...


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Re: Sales Tax is the Cost of Running a Local Business

Sales tax in my markets are between 7.95 and 8.2%. A pretty large disadvantage when consumers are comparing prices from on line sources that don't charge tax at the time of the sale.

People are supposed to pay that tax later when they file their state tax return by voluntarily claiming the amount of goods shipped in from out of state. But for their comparison purposes, they only look at what comes out of their pocket to get the products that they want.

By Paul Epstein on   5/14/2014 1:46 PM
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Re: Sales Tax is the Cost of Running a Local Business

"People are *supposed to* pay that tax later when they file their state tax return by *voluntarily* claiming the amount of goods shipped in from out of state."

Yes. People are supposed to do a lot of things.... :-(
John

By John Sciacca on   5/14/2014 2:12 PM
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Re: Sales Tax is the Cost of Running a Local Business

What I find unusual is that states seem to do so little to collect the tax directly from their citizens. Yes, there is a block for it on your tax return but little is done to extract consequences for not reporting out-of-state purchases except for big ticket items like cars that must be registered. There is an easy solution; the state, and local governments, should go directly to the people and collect the costs of running government directly rather than hitting them up at every turn. Of course, that would most likely create a revolution when it dawned on everyone just how much their government was truly costing them. Another solution would be for everyone to come together and agree on a flat rate. So far, at least, high tax states would rather have 100% of nothing than 75% of something. What will be interesting is to watch Amazon attack this delimma. Now that they are collecting taxes on a high percentage of their sales, I doubt they will like being on the receiving end of lost sales due to "the tax advantage" and, unlike government, will probably find a way to bring the politicians together to equalize their playing field.

By Bill Warren on   5/14/2014 3:05 PM
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Re: Sales Tax is the Cost of Running a Local Business

I get hit by this all time. A level playing field would be for sales tax to be payable by all sellers based on ship to location. I know online sellers moan about the potential cost of compliance of such a system, but that should be just be a cost of business for them. If they want to play, they have to pay. It would encourage a lot more people to shop locally.

By Nyal Mellor on   5/14/2014 3:17 PM
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Re: Sales Tax is the Cost of Running a Local Business

Amazon has fought this tooth-and-nail in virtually every case. Look through this list of legislation in different states:
en.wikipedia.org/wiki/Amazon_tax

By John Sciacca on   5/14/2014 3:33 PM
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Re: Sales Tax is the Cost of Running a Local Business

I told a politician that they should pass a law saying only taxed goods could travel on state roads forcing UPS or Fed X to collect the tax. He said that they wouldn't want to collect the tax.
Yea - We really love it

By Mike Fraser on   5/14/2014 4:10 PM
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Re: Sales Tax is the Cost of Running a Local Business

I work for the state and state sales tax pays my salary. Since sales are down because of internet sales taxes not being paid, we only get a pay raise of 1% every few years.

By RSCC AV GUY on   5/14/2014 4:15 PM
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Re: Sales Tax is the Cost of Running a Local Business

There are about 1500 separate sales tax jurisdictions. If everyone was required to remit sales tax at the source, it would be no more trouble than collecting for local retail. As one time treasurer of SPARS and a CPA, I studied the effect of sales taxes on production work. I does influence it. However, lost sales for goods can often be traced to lack of selection or inventory. If I need to go out of state for a specific size washer, I may as well buy all of my nuts and bolts there as well. Correlation is not always correlation.

By Nick Colleran on   5/14/2014 4:40 PM
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Re: Sales Tax is the Cost of Running a Local Business

Hi John; Just like you, we have had the sales tax come between a sale. I wonder if the powers that be understand that a global economy should have a global (national) sales tax meaning that if we look at the problem of e-commerence, I don't believe it can be compared to local commerence rules and taxes and that it needs a national approach at least. I also believe that folks are starting to see that the money spent locally goes back in to help them in their communities whereas Amazon sales do not.

By Bob Lieto on   5/14/2014 4:55 PM
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Re: Sales Tax is the Cost of Running a Local Business

I meant to say that "correlation is not always causation" in my original post

By Nick Colleration on   5/14/2014 5:35 PM
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Re: Sales Tax is the Cost of Running a Local Business

I also run a business and collect sales tax it ranges from 2% state tax to 14% in Bolder. But I all ready pay business licensing tax and property tax. The sales tax is just plain greedy. If it went to improving infrastructure or schools as it was touted to do when imposed I'd be OK with it. But it goes to bloated bureaucracies, and pro sports teams not anything that anyone can use. The answer is to outlaw sales taxes.

By G Robinson on   5/14/2014 6:03 PM
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Re: Sales Tax is the Cost of Running a Local Business

I keep reading about this and I really have no idea how you guys figure any of this stuff out. Different taxes, depending on where you are and what you are selling. That's a nightmare to figure out. Here in Ontario we have 1 tax. It's paid by everyone everywhere at all levels of the sales chain. I buy something from a supplier and pay that tax. I sell it to a client and they pay me tax. I remit the difference to the government. Government figures out where it goes after that.
Now this does vary a little bit for things like fuel, but I'm not reselling the fuel.

By Greg on   5/14/2014 10:32 PM
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Re: Sales Tax is the Cost of Running a Local Business

"The answer is to outlaw sales taxes."
No! The answer is to stop looking to Government (Fed, State and local) for answers that are almost always better solved by individuals in a voluntary way. Although there are a few things that we need government for, pretty much everything that they do is less efficient, more expensive and over time won't serve the thing it was designed to do in the first place.
Unfortunately, we in society get into a process of "feeding the crocodile, hoping he'll eat you last!" but eventually he WILL eat you!!!

By Chris Kangis on   5/15/2014 8:21 AM
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Re: Sales Tax is the Cost of Running a Local Business

There is also the issue of non-salestax states that are adjacent to taxing states. PA merchants for example, lose a bunch of business to Delaware because of that.

By Wayne Ortner on   5/15/2014 9:31 AM
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Re: Sales Tax is the Cost of Running a Local Business

At our company, we charge an additional $20/hour to install something purchased elsewhere. Being in this industry for over 30 years, I start to realize when a customer is going to pull the internet trick on us. At that point (without him mentioning it, but me SENSING it), I mention our labor rates and toss in "We charge an additional $20/hour for items purchased elsewhere, including the internet." At that very point, everyone comes clean. No one is wasting their time - us or the client. Everyone lays their cards on the table and hopefully a deal is struck.
If a customer doesn't understand a dealership has to make money, they have no respect for your business. I explain that we have to make money in order to take care of our customers. If they have no concern for any of that, they simply aren't our customer.
I truly still believe that if we do our job right, we won't encounter the internet customer. But it still happens every once in awhile. And that is how we handle it...

By Steve on   5/15/2014 10:47 AM
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Re: Sales Tax is the Cost of Running a Local Business

Steve, that is a great suggestion, and something that we have considered. The implementation seems to be tricky, though, as in this case we had already gone over the whole project and presented a proposal THEN they hit me with it. I guess I could have at that point said, "Great! Then our labor rate is X + $20 to install that for you..." Possibly something to consider for the future. Thanks for the idea and the comment!

By John Sciacca on   5/15/2014 11:00 AM
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Re: Sales Tax is the Cost of Running a Local Business

There are multiple issues here. First, look at your list of 21 states where Amazon is required to collect sales tax; many of these happen also to be states where Amazon earns its largest profits. Clearly it isn't just sales tax that makes Amazon successful, and we as local businesses have to adapt to counter that. Steve's suggestion is a good place to start.

Second, the old sales tax system is obviously broken, especially the fact that retailers are generally held or made responsible for compliance by consumers over whom dealers have no control. Instead of dragging mail-order companies under with us, it's time to find a better way.

By Gary on   5/16/2014 8:22 AM
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Re: Sales Tax is the Cost of Running a Local Business

A standard federal tax country wide vs 52 different taxes based on state would be the answer, there would be no way around it for online retailers.

By Mark Pinder on   5/16/2014 2:36 PM

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