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Sunday, 15 February 2015 16:00

Fair Play? Law forcing online retailers to charge state sales tax aims to level playing field

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Vertigo Music General Manager Herm Baker said he plans to monitor Amazon’s prices so that his shop remains competitive with the online seller, especially come October when large e-commerce sites will be forced to collect Michigan sales tax on purchases made by residents. Vertigo Music General Manager Herm Baker said he plans to monitor Amazon’s prices so that his shop remains competitive with the online seller, especially come October when large e-commerce sites will be forced to collect Michigan sales tax on purchases made by residents. PHOTO: KATY BATDORFF

A new law requiring Amazon.com and other online retailers to charge Michigan sales tax could ring up $60 million in new tax revenue for the state next year.

Whether the new law will make cash registers ring more often at Michigan-based retailers, though, is less clear.

Supporters of the bipartisan legislation are just happy to see a “level playing field,” as remote sellers have been able to avoid the 6 percent sales tax attached to goods, often undercutting local retailers and turning bricks-and-mortar businesses into showrooms for the same items that can be purchased cheaper online. Eliminating that advantage is a main thrust of the law.

But it’s too early for retailers to say whether the change will lead to an actual increase in sales or more visits to bricks-and-mortar stores. Some local retailers say they will take a proactive approach by planning to step up marketing efforts as a way to inform customers about the change in law.

At Vertigo Music in downtown Grand Rapids, store manager Herm Baker plans to closely monitor Amazon’s prices to ensure his shop remains competitive.

“I’ve always felt that Amazon having that sales tax advantage is a very unfair thing,” Baker said. “I don’t believe at all that we’ll see a rush back to brick-and-mortar stores, but Amazon loses that advantage.”

Billing itself as “your anti-superstore for music that matters to you,” Vertigo has been open for more than 14 years and almost closed five years ago before the resurgence of vinyl records among consumers. The retailer already is “continually monitoring Amazon” to ensure his vinyl prices are comparable, Baker said. For other local retailers, this could be an effective strategy for competing with remote sellers, he added.

“With the new sales tax law, that could make it easier for us,” Baker said.

The law, sponsored by state Sen. Jim Ananich, D-Flint, and signed by Gov. Rick Snyder on Jan. 15, closes what supporters have for years described as a tax loophole. “Without implementing this fix, (local bricks-and-mortar businesses) will continue to serve as showrooms for online retailers,” the governor said in a statement last month.

The root of the issue dates back to the growth of catalog sales roughly 50 years ago, a trend that has been exacerbated in recent years by Internet shopping.

The new law requires certain remote sellers like Amazon to collect the state’s 6 percent sales tax on purchases made in Michigan. It’s a law modeled after legislation Overstock.com unsuccessfully challenged in New York. More than 20 other states have similar policies.

Terry Stanton, a spokesperson for the Michigan Department of Treasury, said there are “about a half dozen sizable firms” that the new law would impact, but he said he could not disclose them due to protections in the state revenue act.

The law essentially expands the definition of what defines a “physical presence” for companies required to charge sales tax. It now includes companies that have representatives located in Michigan using links directing them to their website, known as the “click-through nexus.” It also includes sellers that have an affiliate located in Michigan.

There is also a minimum threshold for sales meant to exempt smaller out-of-state retailers from collecting the tax.

Leveling the playing field

While buyers in Michigan have always owed a 6 percent use tax on out-of-state purchases, it is essentially voluntary and the state collects only a small percentage of what is owed. According to Stanton, only about $7 million was remitted back to the state in 2013 through 117,000 income tax returns. That’s less than 2 percent of the roughly $400 million believed to be missed by not remitting use tax from online purchases.

“This is a change that we’ve been seeking for decades,” said Tom Scott, senior vice president of communications and marketing for the Michigan Retailers Association. “A number of out-of-state merchants will have to play by the same rules that Michigan businesses do with regard to collecting sales tax. It won’t capture it all, but it’s a step in the right direction.”

Supporters still face an uphill climb in getting federal legislation passed, which they say would bolster sales tax revenue even more. The issue has stalled in Congress in recent years and faces several challenges, particularly from states that don’t charge a sales tax.

“In order for this state and others to begin to see that type of revenue still takes an act of Congress,” Stanton said of the $400 million the state continues to miss out on annually.

“We’re hopeful, but I think we’d be surprised if (Congress) were to pass it this year,” Scott said.

Additionally, when confronted with these changes in some state laws around the country, Amazon has simply opted out of doing business in those states with an expanded definition of “physical presence.”

Using it to their advantage

Some retailers are considering marketing the change in state law — which takes effect Oct. 1 of this year — to inform customers what it means to them.

“I’m certain that when we reach the fall and this goes into effect in October that we’ll be pointing it out to our customers,” said Bill Fehsenfeld, owner of Schuler Books Inc., which has a store in Grand Rapids and two in greater Lansing. The company also owns Nicola’s Books LLC in Ann Arbor.

“When they buy on our website in Michigan, they have to pay sales tax,” he said. “People have perceived that as an advantage for shopping out of state, but that perceived advantage won’t be there anymore and we want people to know that.”

Local First, a small-business advocacy group in Grand Rapids, predicts the new law will indeed drive shoppers to local businesses.

Last year, an Ohio State University study found that in five states where similar sales tax laws were enacted, households reduced spending at Amazon by nearly 10 percent. That was partially offset by a 2-percent increase in spending at local bricks-and-mortar stores, the study found. Local spending increases 6.5 percent when the cost of an item is more than $300.

Additionally, the study found that consumers reduced spending on larger-ticket items online — a 15.5 percent drop for purchases of more than $150 and a 23.8 percent drop on purchases greater than $300 — after a state enacted an “Amazon Tax.” This suggests that many buyers were shopping online to avoid sales tax on larger items.

The report’s authors also found that there was a 19.8 percent increase in spending at competing online retailers after the tax was enacted.

“Overall, our study shows that Amazon experiences a decline in sales following the implementation of an Amazon Tax. Households substitute Amazon with other retailers: either online retailers who are exempt from collecting sales tax, or in-state retailers (online and bricks-and-mortar),” the report says.

“Local retailers could use this new law to their advantage by reminding customers that with the cost barrier removed, shopping local is a way to keep their money circulating in our West Michigan economy,” Samantha Vanderberg, Local First’s marketing manager, said in an email.

Changing behaviors a difficult proposition

But while retailers are optimistic, any sort of measurable impacts on their businesses will remain to be seen.

“That’s going to be difficult to assess,” said Patricia Huddleston, a professor of retailing at Michigan State University’s Department of Advertising and Public Relations. She added that the “most obvious advantage” is local retailers’ ability to match prices, especially if online retailers don’t offer free shipping. Local retailers may also see “tangential” benefits if new tax revenue is used on infrastructure improvements, like the roads, she said.

While Stanton said 2 cents of every 6 cents in new revenue would be dedicated to the School Aid Fund, it would be up to the Legislature to earmark the rest for specific purposes.

Moreover, consumers might not move back to shopping at bricks-and-mortar stores because of a 6 percent cost increase for online shopping, particularly if they prefer the ease of e-commerce, Huddleston said.

“In general — tax issue aside — we are seeing an impact on brick-and-mortar shopping because of online shopping,” she said. “I don’t think the sales tax itself will have a huge impact one way or another on whether consumers actually go to local retailers.”

Scott of the Michigan Retailers Association agrees.

“This isn’t going to change that,” he said. “It will cause some people to think, ‘Gee, if the prices are the same, do I really want to be sending the dollars out of the state or support businesses in Michigan?’”

Huddleston also doesn’t particularly see the tax law change as much of a marketing tool. With a level playing field, she said, local retailers should focus on what makes them different.

“I think local retailers are going to be better suited to focus on the services they offer and actually getting customers into the store to appreciate the shopping experience,” Huddleston said.

Read 3935 times Last modified on Sunday, 15 February 2015 16:35

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