Taming the Amazon with taxes

States look to Internet taxes to close budget gaps

Internet retailers cite a 1992 U.S. Supreme Court decision involving catalog sales, Quill Corp. v. North Dakota, which ruled that states could require only companies that had a physical presence within the state to act as tax collector.

To get around the ruling, some states are expanding what it means to be physically present. For example, an online retailer hiring a marketing firm or owning a subsidiary inside the state would qualify under definitions adopted in some states.

In February, the Texas comptroller demanded that Amazon.com pay $269 million in back sales taxes because a subsidiary operated a warehouse near Dallas. Amazon is appealing the order.

Last year, New York enacted a law that said Internet retailers' practice of paying commissions to marketing agents based within the state constituted a presence. Arkansas, Colorado, Illinois, Rhode Island and North Carolina quickly followed with similar laws.

Bills are pending in Arizona, California, Florida, Hawaii, Massachusetts, Minnesota and Pennsylvania. Texas lawmakers passed such a measure, but Gov. Rick Perry vetoed it. Now legislators are trying to resurrect the bill by attaching it to a larger budget measure. The matter is now before a conference committee.

California estimates it loses at least $200 million a year in uncollected tax from online sales, $83 million from Amazon.com alone. A bill that has passed the state Legislature would force Seattle-based Amazon and others to collect that tax from California residents.

Amazon, Overstock.com and other big Internet retailers cite the Quill decision as their primary defense against collecting sales taxes, but they also argue that collecting tax in the District of Columbia and the 45 states where a sales tax exists would be extremely complex and expensive.

"There are over 8,000 taxing jurisdictions in the United States," said Jonathan Johnson, president of Overstock.com, which has offices only in Utah. "We think it's wrong that states are trying to cause out-of-state retailers to be their tax collectors."

The Spending Seesaw

by VINCENT FULMER

In tough economic times it is all the more important for consumers to distinguish between items they “must have and those they “would like to have.” One cannot be postponed: The other most certainly can wait.

The problem is that all too many consumers do not take the time or trouble to ask themselves “Do I really need this? Can I just as well postpone it or do without?” The choice is often difficult because the options are not always clear. The problem is muddied and magnified when all of the economic experts and most government entities urge consumers to spend themselves silly to help the economy recover. The problem is deepened by desperate merchants who engage in complex price discounting, noisy up-grades, confusing introductory offers and exaggerated advertising claims—the dark side of merchandising.

Thorstein Veblin, the economist, wrote extensively about the phenomenon of “conspicuous consumption” as to pervasive practice by consumers. Will Rogers complained that “Too many people spend money they haven’t earned, to buy things they don’t’ want, to impress people they don’t like.” Where is Andy Rooney of 60 Minutes when we need him?

What inescapably dooms the rational decision to purchase an item is the universal consumer memory lapse about income taxation. Almost everyone assumes that the price tag shown on an item is the actual cost to the purchaser. Nothing could be further from the truth. What the purchaser sees is not what he or she gets! When income is taxed before the consumer makes a purchase, the consumer has already paid a price for the dollars he or she is about to spend.

The actual cost, then, is not 100% of the price tag but more like 120% of the price tag shown for anything, for everybody. Add two extra cost items that add to the bad news:

1. Sales taxes might apply, depending upon local or state laws or the item purchased. These generally range from 5% to 8% of the price tag.
2. Finance charges if the consumer buys on credit or otherwise borrows to get the money to make the purchase.

How does it look for consumers to pay 130% or 140% of the price shown? It ought to feel good because most consumers are doing it. Isn’t it high time for consumers to do a better job of distinguishing between must have and would like? Isn’t it time for consumers to spend less and save more if they can? Alas, consumers are an irrational, disorganized lot to begin with, and an unpredictable prop for the economy.

Now, businesses face a similar challenge and a responsibility to distinguish between things they must have to conduct their operations and the things they would like to have—in order to remain competitive. But businesses have three powerful advantages consumers almost never have.

1. Businesses typically have a basic choice between incurring a current operating expense or investing in assets like equipment and inventory to save on current and future operating expense, or to grow the business. Consumers rarely have such options. The tax laws allow businesses to spread their investment cost over a number of years, but not consumers.

2. Businesses are allowed to deduct the current year cost of an expense from their revenue before arriving at their profit—which is then taxed at lower rates than consumer income. Generally speaking, businesses spend on their needs with less costly before tax dollars; and unlike consumers, businesses are not noted for irresponsible, carefree or casual spending, or impose buying—despite all of the current concern about executive compensation.

3. Unlike consumers, businesses can also pass along some or all of their expense increase to customers, in the form of price increases. When times are tough, it is more difficult or impossible to do so. But well-managed businesses are able to use highly skilled professional resources to help them contain and control expenses.

In addition, for a variety of justifiable reasons, the interest charged on consumer borrowing is roughly double the interest charged on business loans. Time payment, or consumer credit card purchases on consumer durables—kitchen appliances, TV’s, home furnishings and the like cost the equivalent of 20% per year. Business loans are typically in the range of 10%.

Home buying interest rates might seem like a glaring expectation. But they are not. Because of the traditionally long periods used in mortgage financing, the published rate of 5% on a 30-year mortgage seems low enough. But the 5% translates into three to four times itself when the period of the loan is normalized to a ten-year payoff.

Businesses account for roughly 25% of the nation’s spending, consumers roughly 50% and government roughly 25%. The fiscal sedative/stimulus spending debate in the government sector is a subject of hourly public debate and needs no further elaboration here. At its core government spending is a must have versus would like seesaw, no less than the challenge in the private sector.

One does not have to be an economic genius or policy maker to know that business investment spending is the most direct and effective way to stimulate the economy and create jobs. That is where the jobs are. That is where employment opportunities are created, now and for the future. What can all of us in America do to encourage business to invest?


The author is an economist and consultant to early stage companies in New England.

No relief! States increase sales taxes

FORBES: U.S. Sales Tax Rates Hit Record High

During 2009 seven states and the District of Columbia raised sales tax rates, with one jurisdiction--North Carolina--actually doing it twice. Only four states hiked rates in 2008 and only one in 2007. Given state budget problems, the 2009 state sales tax increases aren't surprising. States have also been raising income tax rates on the wealthyand on corporations and boosting excise taxes on alcohol and tobacco. With states now facing record budget shortfalls, more tax increases seem likely.

State level sales tax generally accounts for only about two-thirds of the total sales tax bill. The rest comes from levies assessed by counties, municipalities, Indian tribes and special-purpose taxing districts funding mass transit, urban renewal and even stadiums. Among lower level jurisdictions such as counties and towns, Vertex counted 649 new or increased sales tax rates during 2009 and just 192 reductions.

The result is a wide range of combined sales tax rates across the country. At the bottom: 0%, found in all of Delaware and New Hampshire, and most of Montana, Oregon and Alaska. The country's highest rate now is 12%, in the tiny portion of tiny Arab, Ala., (population 7,500) sticking into Cullman County. The rest of the northern Alabama town, in no-sales-tax Marshall County, pays just 8%.

Right now Chicago has the highest big-city rate, 10.25%. But in a move forced by Cook County lawmakers, the rate is scheduled to drop on July 1 to 9.75%, matching that of Los Angeles. In New York City the total bite is 8.875%. Other high big-city rates include San FranciscoandSeattle(9.5%), New Orleans (9%), Houston, Dallas and Charlotte (8.25%), Las Vegas (8.1%) and Philadelphia and Atlanta (8%).

Do taxes matter?

Apparently for retailers in Massachusetts this past holiday season. Business is down!

Holiday sales at local merchants dropped 2.6 percent compared with the same period in 2008, the third straight year of declines in Massachusetts, according to a survey released yesterday by the Retailers Association of Massachusetts.

Results of the 2009 survey of 3,100 business owners were in line with the association’s projection of a 3 percent drop for November and December sales. That comes on top of a 7 percent plunge during the same months in 2008.

Some businesses, including jewelers and home goods shops, saw a small uptick in Christmas sales, but the recession, coupled with an increase in the state’s sales tax, made it another tough year for Massachusetts merchants, according to Jon Hurst, president of the Retailers Association of Massachusetts.

“Retailers were more prepared this year with lower inventories and lower expectations,’’ Hurst said. “This year’s decline isn’t as bad as 2008, but that was really the worst holiday season that the retail sector had seen in a long time.’’

Research firm ShopperTrak yesterday reported that sales across the country rose 1.7 percent for the 2009 holiday shopping season while traffic at shopping centers dropped 2.9 percent for the same period. Winter weather also seemed to take a toll in New England, with BJ’s Wholesale Club blaming a severe snowstorm before Christmas for taking away sales.

Hurst and other local merchants suggested Massachusetts fared worse than other states because of the sales tax increase. State lawmakers hiked the sales tax in August to 6.25 percent from 5 percent.

BHI's analysis of last year's tax hike is here.

Taxes do matter: Hav-a-Tampa to close plant

A simple narrative. Taxes raise the price of a good. Demands trends downward. Fewer goods produced. Jobs lost. Taxes matter.

Several things conspired to hurt Altadis' sales, McKenzie said, including the recession and the growth of indoor smoking bans. The bans have especially hurt sales in cold-weather states, where it's impractical to smoke a cigar outdoors in the winter, he said.

However, the company attributed much of its trouble to the State Children's Health Insurance Program, or SCHIP, a federal program that provides health insurance to low-income children. It is funded, in part, by a new federal tax on cigars and cigarettes. McKenzie couldn't say how much sales of Hav-A-Tampa cigars had fallen off, but the numbers have dropped significantly, he said.

Previously, federal excise taxes on cigars were limited to no more than a nickel, said Norman Sharp, president of the Cigar Association of America trade group. The tax increase, which took effect April 1, raises the maximum tax on cigars to about 40 cents, Sharp said.

Before the tax increase was passed, the cigar industry warned that consumption of cigars could fall as much as 30 percent in the year after its passage. It's not clear yet how big of an impact the law is having on sales, Sharp said.

Harrison said she understands the company's predicament and that Altadis has tried to treat its employees fairly, including guaranteeing employees two months of pay. Like her employer, she put part of the blame on the SCHIP tax hike.

"We can't afford to make these cigars in the U.S. anymore," she said.

BHI in the Boston Globe: Sales tax hike necessary?

BHI Executive Director David G. Tuerck in today's Boston Globe:

On this matter, it is the governor who is right and the bill's sponsors who are being "disingenuous." For one thing, the $900 million estimate apparently ignores the fact that sales taxes drive business to other states and to the Internet. Under the new law, a TV set that could be bought for $1,000 in New Hampshire will cost $1,062.50 in Massachusetts, just another reason to drive an hour to make a big purchase and to stock up, along the way, on liquor, cigarettes, and other items.

The proposed tax hike will have negative consequences for the state economy. We predict a loss of 12,666 private-sector jobs, as stores in Lawrence and Lowell lose business to stores in Salem and Nashua. And because unemployed workers stop paying income taxes, the state will lose revenue from that source even as it gains revenue from the sales tax. In fact, the higher sales tax can be expected to yield only about $674 million in new revenue when losses in other revenues are accounted for.

Before the Legislature decides to inflict a new burden on state taxpayers, retailers, and workers, it would do well to ask just why it wants to enact a broad-based tax increase in the first place. A 25 percent increase in the sales tax would be a panicky response to what was seen just a few years ago as an exercise not in fiscal ruin but in fiscal dexterity.

The irrepressible urge to raise the state sales tax

Talk is resurfacing about boosting the sales tax by 20 percent. The bad penny of tax policy; it won't go away.

Top state lawmakers are seriously considering a controversial and politically risky plan to boost the sales tax by one penny to 6 percent, socking it to Bay State residents already facing possible gas and booze hikes.

Both House Speaker Robert DeLeo (D-Winthrop) and Senate Ways and Means chairman Steve Panagiotakos (D-Lowell) are eying a sales tax of 6 cents on the dollar that they say would bring an additional $750 million a year into state coffers.

“I don’t think anything can be considered as off the table,” DeLeo said yesterday, later adding he plans to pass reforms before any additional taxes are considered.

A conservative think tank blasted any talk of a sales tax hike in a tough economy, saying that even a one penny increase could mean a loss of 10,000 private sector jobs along with a $40 million drop in investment revenue.

“Any tax increase the state undertakes right now will have a negative effect on the economy because it will drive business to other states,” said Beacon Hill Institute Executive Director David Tuerck, who urged lawmakers to focus on cuts instead.

Tax hikes can be hazardous to a political figure’s health - especially during a recession - as evidenced by a recent dip in Gov. Deval Patrick’s job approval ratings. Many speculated Patrick’s plans to boost taxes on gas, booze and candy were partially to blame.