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Bricks, Clicks and Tax Tricks

Alabama storefront retailers face a disadvantage as high as 10 percent competing with online retailers. It’s not price competition that hurts. But tax scofflaws who shop the showroom then bust for the tax break online.

The online tax inequity is really about jobs as well as taxes, says Rodney Barstein, founder and COO of Simply Fashion Stores Ltd.

The online tax inequity is really about jobs as well as taxes, says Rodney Barstein, founder and COO of Simply Fashion Stores Ltd.

Once upon a time, when Alabamians wanted to make a purchase, their only option was to peruse the wares at local shops and decide which item to buy. If an item wasn’t available in a local store, for many people, it just wasn’t an option. In many Alabama communities, shopping at the local mall, downtown or neighborhood center was the central social activity, and the grand opening event of a new retail store drew Disneyland-sized crowds.

Today, online shopping means a whole world of options are available to the consumer. And, while online retailers may make holiday shopping more convenient, their growth comes with a price. The advent of online shopping has changed the face of many neighborhood shopping districts, has arguably contributed to a decline in customer service and has affected local economies, costing Alabama thousands of jobs and tax dollars each year.

Many independent Alabama retailers continue to compete successfully in this new world of retail. But a lack of legislation regarding sales tax remittance for out-of-state purchases gives online-only retailers an unfair advantage and, retailers say, is damaging local economies.

A New Retail World

While online retail sales account for just 5 percent of all retail sales, they are growing at more than three times the rate of all other retail sales, says Nancy Dennis, director of public relations at the Alabama Retail Association.

Online retailing “has made shopping extremely competitive,” says Rodney Barstein, founder and chief operating officer of Simply Fashion Stores Ltd., a network of 250 clothing stores headquartered in Birmingham. “Before online retailing, customers were limited to products that were within driving distance. The retailer had control over the items that they wanted their customers to see and purchase. The retailer also had control over pricing.”

But the advent of online shopping turned the tables — customers took control of what items they would purchase and the price they would pay, Barstein adds.

More choices and more competitive prices are good for consumers, and no problem for most retailers. The problem is that retailers without a presence in the state of Alabama are not required to collect the sales tax that is owed to Alabama city, county and state governments, giving them as much as a 10 percent advantage when they sell to Alabama consumers.

“Brick-and-mortar stores aren’t as concerned about the competition from online retailers as they are about the unfair advantage the government has given out-of-state, online-only retailers by not requiring those retailers to collect sales taxes,” Dennis says. “Your neighborhood retailer can compete in the realm of shopping experience versus convenience. They can even compete on price, but they can’t compete when their competitor doesn’t have to tack the tax onto the price.”

Tax Tricks

Even when consumers purchase online from sites that do not collect sales taxes, those taxes are still due to local cities, states and counties. The courts have ruled retailers without a presence in the state don’t have to collect sales tax on purchases made by Alabama customers, but the consumers are supposed to take responsibility for paying those taxes anyway. “Technically, consumers are supposed to remit sales taxes each year on their income tax return on any goods for which the retailer does not collect the sales tax,” Dennis says. “The reality is that rarely happens.”

Instead, many consumers view purchases from online-only stores as a way to save money on taxes. At Cameras Brookwood, a photographic supply and imaging store in Vestavia Hills, owner Dianne Wammack has seen the effects of untaxed online sales firsthand. “People use our shop as a showroom,” Wammack says. “They look at high-dollar cameras and equipment, ask us questions, and then they buy online. They don’t buy here.”

Cameras Brookwood charges the same prices as the online retailers, so the problem isn’t competitive pricing. For some high-priced items, however, some consumers just can’t resist the opportunity to avoid paying sales taxes, which they see as a 9 percent discount, Wammack says.

Brick-and-mortar retailers aren’t the only ones losing in this situation. State and local governments and the people who live in Alabama pay the price, as well. Most cities and counties in Alabama rely on sales tax revenue to operate schools and other local services, says Robert Robicheaux, who chairs the department of marketing, industrial distribution and economics at the UAB Collatt School of Business. When online retailers don’t collect sales taxes, states and municipalities sacrifice valuable revenue. Alabama loses $2 billion in taxable sales to out-of-state online retailers each year, resulting in the loss of as many as 4,000 jobs annually, according to a 2012 study by Robicheaux.

“Online purchases have always been subject to sales tax, but it used to be difficult for retailers to know how much to charge and how much to remit to each locality,” Robicheaux says. “But now, computers make it easy. There’s no reason that someone selling online shouldn’t remit state, county and city sales taxes.”

In addition to losing sales tax revenue, the status quo is also causing Alabama to lose jobs, Barstein says. “If a retailer sees a 10 percent drop in sales due to competition from online, then that retailer will be cutting payroll and cutting jobs,” he says. “Conversely, if their sales increase, they can add jobs. Many people think that the [unfair tax situation] is about sales tax revenue, but it is really about jobs.”

Finding Solutions

The Marketplace Fairness Act was introduced in the U.S. Congress earlier this year and, if passed, would grant states the authority to compel remote sellers, no matter where they are located, to collect sales tax at the time of a transaction, exactly as local retailers are already required to do. The measure passed the Senate in May and is awaiting a hearing before the House Judiciary Committee, which is expected before the end of the year.

For members of the Alabama Retail Association, passage of the Marketplace Fairness Act is a top priority, Dennis says. Members have written editorials, met with the governor and lobbied elected officials.

“We feel good about the probability of final passage of the Marketplace Fairness Act in 2014,” Dennis says. “The American public knows these are taxes already owed and that having all retailers collect sales tax at the point of sale is the easiest and most fair solution.” Should the Marketplace Fairness Act pass, Alabama could experience potential economic growth of $6.8 billion in additional GDP and 21,732 new jobs by 2022, according to a recent study by economist Art Laffer.

As retailers wait to see if new legislation will level the playing field for them, many are finding ways to continue boosting their businesses in the meantime. “The most successful retailers embrace online and mobile sales and have added those shopper options to their attraction arsenal,” Dennis says. Shopping is still all about the customer and making sure the customer’s experience is the best it can be, whether that is in store or online.”

ONE SPOT Simplifies Taxpaying

For years, Alabama retailers have complained that paying sales and use taxes in the state is an onerous process. And state leaders do not disagree. “We are one of the few states that has such a convoluted way of remitting sales tax,” says Alabama Revenue Commissioner Julie Magee. “Retailers are required to file separate returns in each jurisdiction, and that means those with locations in several Alabama cities and counties could be required to process hundreds of returns monthly.”

But a new system, which debuted October 1, has simplified the taxpaying process for Alabama retailers and businesses of all kinds. The Optional Network Election for Single Point Online Transactions, also known as ONE SPOT, allows businesses to file and remit city, county and state sales, use and rental taxes, all in one place. Rather than each business having to use multiple forms and multiple websites, the new system allows retailers to access the My Alabama Taxes portal on the Alabama Department of Revenue website and pay owed taxes to all government entities at once.

As of October 21, more than 121,000 tax returns had been filed through ONE SPOT, says Alabama Deputy Revenue Commissioner Curtis Stewart. Within the first three weeks of the system’s startup, the state had collected more than $76 million in sales, use and rental taxes and those monies had been distributed to 551 different localities.

Department of Revenue leaders expect those numbers to continue growing. “The retailers we’ve heard from are grateful to have one way of filing versus having to touch many different returns each month,” Magee says. “And we don’t charge anything for the service; we simply serve as a conduit and remit the owed monies to the localities.”

Nancy Mann Jackson is a freelance writer for Business Alabama. She lives in Huntsville.

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