Sales Tax is the Cost of Running a Local Business - ResidentialSystems.com

Sales Tax is the Cost of Running a Local Business

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.
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“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.

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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.

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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. 

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