Tuesday, April 23, 2013

Perfect Example of Government to Private Sector Disconnect

If you haven't heard, the Senate just passed a bill 74-20 that will require online retailers to gather sales taxes based on the purchaser's address.  This is something that on a consumer side could be very costly, not only for the consumer who may end up paying as much as 6, 10, or even 12% in some areas in additional taxes.  Having grown up in Tennessee where the tax can be as high as 9.75% and I could not stand how much extra I had to pay.
Then came websites like Amazon that allowed you to buy the exact same items as in the store, but didn't require state sales tax because they did not have a distribution center in the state.  And at nearly 10%, the shipping cost of most items was less than the sales tax on most items over $100.  Then when Amazon included free super saver shipping on items over $25, my brick-and-mortar shopping diminished down to groceries and must-have items.

That's the consumer side of the bill, however I am more concerned about the company side of the bill and how it's going to affect their business.
1) Companies now will have to track every single transaction, where it is shipped, and will have to file a sales tax form for every single locality that has even one transaction.  There are over 7,500 different sales tax jurisdictions in the United States (with over 1,000 tax code changes to keep track of in the last year alone).  Look at this map below (Source: Journal of Accountancy) This represents every single sales tax locality in the United States.  And don't forget, many localities charge different tax rates for items based on their use.

In 2010 Amazon reported 13.7 Million items were sold to addresses all over the world on JUST Black Friday.  The logistical nightmare of this task is enough to make accountants all over the country cringe. iTunes is another company whose accountants will feel the hair on their neck stand up if this passes with an estimated 1.2 Billion sales for just music in 2007.

2) Companies may lose revenue based on this.  As mentioned, for two items priced the same, the difference in having to pay sales tax may be enough to justify waiting to get the item.  A perfect example of this is the Electronic Arts' online retail outlet, Origin.  There you can buy video games, start to download them immediately, and not have to pay sales tax.  Origin is not able to reduce the price of their games because they have to ensure that the big box stores like Best Buy, Wal Mart, Target, etc... are able to sell their copies as well.  With that being the case, the only benefit this site has over some place like Best Buy is the fact that you don't have to pay sales tax on your new $60 video game.  This effect may not be great for other websites who offer discount prices, but for some (like Origin) it may completely destroy their entire business model.

Why would something like this bother me?  Because it shows just how much of a disconnect there is between the government and the private sector.  A legislator looks at this bill and decides "Hey, this looks easy enough." and votes yes without researching how amazingly complex this task will be for companies to keep track of.

Chalk this up as yet another reason why I believe we need "Professionals who are legislators", not "Professional Legislators."


Alan said...

The brick and mortar stores are under the misconception that they are losing to online retailers solely or primarily because of no online sales tax. It's going to be a sad day for them, even if this bill passes, when people still prefer online outlets.

Off the top of my head, I can think of three advantages to shopping at a brick and mortar store. The first and primary advantage is that you can buy an item and have it almost immediately. There is no waiting on it being shipped to your home. The second, is that you can get a close look at the item, touch it, feel it, and notice minor features that may not be apparent from its online description. Certain items, for example clothes, are harder to buy online because you cannot interact with them. Third, there are no direct shipping costs. Sure, stores at some point have to pay to ship freight to their location, but they do it at a cost that is lower than what it would cost you to ship it to your door. If you want to buy a particularly large and heavy item, it may not be worth the shipping from an online retailer if you can find it locally. However, most items are small enough to be shipped for a reasonable cost.

So what about online retailers? Online retailers have lower overhead. They do not have to pay for as many employees, buildings and their maintenance, etc. They also have more direct competition. It is possible to search several websites simultaneously through google or other comparison services. With less overhead and increased competition, online retailers will typically have lower prices. Online there are also a wider selection of choices than you can have in a store and each item has an easy to find description, specs, and reviews. These advantages create confidence for the customer because they know they can explore all the options, make the best choice, and get it for the best price. And, you can do all of this from the comfort of your own home.

The problem for brick and mortar stores is that most of the time the advantages of online retailers beat the advantages of shopping online. It is understandable that they are complaining about sales tax, price is the primary factor for deciding what to purchase. I honestly believe that it is fair that sales tax be collected from people that shop online for the states in which the customer lives. By law, you are supposed to report a use tax for the items you buy online, even though I do not know anyone who currently does that. But, even with sales tax, online retailers will still have lower prices, more choices, and often more convenience (aside from waiting for delivery).

Alan said...

Here are some examples:

1. Steel Shelving.

Some steel shelves I wanted to buy for my garage cost between $180 - $200. However, shipping on such a large heavy item was over $100. Brick and mortar store wins.

2. Video Games

I disagree with you completely on your analysis of online services such as Origin and Steam. For those of you who do not know, Steam and Origin are online stores where you can buy games and other software. You can save your credit card to the store, make a purchase of a game, and have it start downloading to your computer immediately. Steam and Origin store your library of games and make it easy to re-download anything you've purchased, it handles updating of games automatically, and even creates a social network with other people you play with allowing you to chat and invite each other to play any of the games you share. Steam often has extremely good sales (cheaper than stores) where you can pick up an older game for a few dollars. It also has games you will never find in a retail store. It is possible now to download a game quicker online than you could drive to the store, wait in line, purchase the game, and drive home.

3. Laptop

Go to a store like Best Buy and you will find a large selection of laptops. I've needed a new laptop, I've driven to a Best Buy wishing I could buy a laptop, but still couldn't be convinced to buy one there. Why? Confidence and selection.

On large purchases such as a laptop, people need to know they are making a good choice and getting a good price, which can be very difficult to do in the store. Best Buy does a poor job of making technical specifications visible on their computers. For example, when comparing screen resolutions many of them were not labeled or displayed anywhere. They had software running on each machine with specs, but only a few of them listed the resolution after clicking through some menus. While they had a large selection of different brands, I noticed they were missing a particular model that was part of Samsung's lineup, which was in fact one I was interested in buying. And then, there are the prices. How do I know that this laptop which is labeled $1,249 is a good deal? Am I going to regret buying it after I go home and see the same machine for $999?

Online these problems do not exist. I can sort and search available laptops by any feature or specification. I can see the prices and compare them to many other stores. I can go to Samsung's website and see their entire lineup of available laptops and know that I'm getting the complete picture. This is something that brick and mortar stores need to fix, badly. They need to make sure that specs are easy to find and that it is easy to get the complete picture. They could carry less different brands, but make sure they have the entire lineup. Put them all in a row so that you can go down the line and decide which one is right for you. Supplement this with kiosk that allows you to sort, filter and compare the different options. Price match anyone before or after the sale. If they did this right, I would have walked out happily with a new laptop.