It’s only fair that Internet retailers should collect sales tax, the same as brick-and-mortar stores. But fairness can take a backseat to politics and, despite a push this year to have Congress equalize the playing fields between the two, it’s a good bet that 2014 will pass with no new legislation in place. Traditional retailers will bemoan what in effect amounts to a government-imposed surcharge on their businesses. States and localities will bemoan the loss of revenue (by some estimates, as much as $23.3 billion annually). But even without legislation, the situation may yet resolve itself: Internet and conventional retailing are beginning to converge.
Long, long ago in Internet time — say five or ten years — the virtual and physical worlds of retailing were almost entirely separate, each seemingly in direct competition with each other. People would buy locally, or they would buy online. And as the Internet became ever more pervasive, it was clear who was losing the battle: the antiquated old guard. Cyber Monday stole sales from Black Friday. Internet bookstores undermined mega-retailers such as Barnes & Noble (which, ironically, had earlier undermined local bookstores). Shoppers — in what became known as “showrooming” — would visit stores to handle and try out products, only then to buy them online. And one thing that particularly stung was that — at least in states with a sales tax — brick-and-mortar stores were at an automatic price disadvantage. (In Massachusetts, for instance, at 6.25 percent.)
The reason is that long-established law says stores must have a physical presence in a state in order to be subject to sales tax. Thus, Internet retailers — like mail-order catalogs before them — are exempt (except, obviously, in their home states). For years, major retailers and state associations have pushed for a fix, and last year, with Senate passage of the so-called Marketplace Fairness Act, they seemed close. But the measure is now hung up in the House, as conservatives such as Ted Cruz denounce it as “a job-killing tax hike, plain and simple.” Given the GOP’s anti-tax fervor, it likely won’t move.
So why is it then, that when Massachusetts’ residents buy from the number one e-tailer of them all — Amazon.com — they have to pay sales tax?
Because Amazon has a physical presence in Massachusetts. And the reason it does speaks to how dramatically retailing is evolving.
Humans like instant gratification. When many of us buy something, we want it immediately, not in three or four days. That’s something brick-and-mortar stores can do easily. Online retailers cannot. Amazon knows this and so has been setting up warehouses around the country to let it deliver packages to customers more quickly. It’s also why the company has rolled out same-day delivery in a number of cities — including Boston. It’s a smart strategy, but those warehouses are enough to give Amazon a physical presence in a state, meaning it now has to collect sales tax, which it’s now doing in 23 states.
It’s a lesson for any e-tailer that wants to grow big (which, of course, is all of them): You need to get closer to your customers, meaning you eventually need some physical presence in a state. Indeed, some online retailers, such as JustFab, are now opening their own brick-and-mortar stores.
From the other direction, old-line retailers are now adopting online tactics. Chains such as Best Buy or Pier One, for example, allow customers to shop online or in a store. They can pick up items on-site or get them shipped. And they are increasingly finding that “showrooming” is taking a backseat to “webrooming,” with consumers conducting research on the Internet and then going to a physical store to make their purchases.
All of which leads to this prediction: Online and traditional retailing will eventually look like two sides of the same coin. Such hybrid stores will offer the best of both the virtual and real worlds, letting consumers touch and feel goods, meeting their desires for instant gratification and providing all of the convenience of online shopping. Real estate developers will doubtless cheer that malls are here to stay. Cheering also will be tax collectors who — even without federal law — should find it ever easier to collect the sales taxes they eagerly desire.