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Are Shifts in Business Trends Sales Tax Driven?

In mid-January 2014, I stumbled across an article in the Wall Street Journal discussing shopping trends over the holiday season. According to the Journal’s article, As Shoppers Skip the Mall, Stores Search for Fresh Lures, the shift to online shopping and away from the traditional brick-and-mortar was heavily price driven. Of course, other factors contributed such as convenience of shopping online and having a more defined mission when going to the store due to online research. However, the article suggested a “permanent” shift away from store showrooms and more to that of an online marketplace. Is it possible that a perceived sales tax savings is also contributing?

Irrespective of the rationale, the results of this year’s shopping trends analysis was staggering. Courtesy of ShopperTrak, a data firm, stores can monitor foot traffic by the use of a network of 60,000 devices. The devices can measure the foot traffic at malls and retail space in the top 54 largest markets for the United States. According to the article, the foot traffic plummeted some 28% in 2011, 16% in 2012, and another 15% in 2013. In total, the tracking network estimates that the foot traffic was down to about 17.6 billion from over 30 billion just three years ago. Further, the data also concluded that an average shopper visited 5 shops per mall visit in 2007 and only 3 this past season.

Another staggering statistic was observed by a study conducted by the CoStar Group. CoStar measured the amount of new retail space opened annually by square footage in the recent years. In the same 54 largest US markets, only 44 million square feet of new retail space opened in 2013. While it sounds like a lot in 2006 some 325 million square feet opened in the markets. This 87% decline also affirms that retailers are aware of the shift in shoppers’ habits.

Contrary to popular belief, sales and use tax is due on online purchases. What many refer to as the Amazon issue in sales tax is actually whether an online retailer must charge, collect, and remit tax in a given state. However, despite the state of the law, most consumers believe that if they are not charged tax online, they are not required to pay tax on a purchase of tangible personal property. Due to this mistaken belief and for administrative convenience, many states try to shift the burden to the online retailer to collect rather than trying to hunt down the individual consumer.

Most states have a mechanism for remitting tax to a state for purchases made online. For example, in my home of Florida, the Florida Department has a form DR-15 MO (Mail Order). It is designed for the scenario in which a consumer makes a purchase of a taxable item online but because the company does not have nexus with the consumer’s state, it is not required to charge, collect, and remit sales tax. Whether it is negligence to the law or the fact that most people just do not know, only a few hundred DR-15 MO’s are filed each year in Florida. I am sure each of you reading this article took the time to carefully track, report, and remit your sales and use tax on your online purchases this past holiday season.

Being that most do not report the sales and use tax on items and many others do not know, most consumers view online shopping as a sales tax savings during the holidays. How many times have you heard, “If I buy this online I don’t have to pay sales tax?” Regardless of the perception, one can only wonder if sales tax in addition to the reasons outlined in the article are contributing to the staggering shift in the way shopping is done.

The retailers are cognizant of the change as well. Best Buy, for example, observed that many of its customers try out the products in its showroom and then purchase them online. Other companies such as Target seemed less concerned as they believe while fewer consumers may be visiting the store, the average consumer is spending more per visit. Still other stores such as Macy’s are converting many of its stores to supplement its online sales by allowing more stores to fulfill online orders. Retailers such as Sears, Gap, and JC Penny, have closed several hundreds of stores over the past few years which further evidences the shift in shopping.

Overall, the article shed light on the ever shifting economy driven by the Internet and the numbers are inescapable. Stores throughout the country will be shifting their traditional business model to deal with the heightened online purchasing and reduced amount of people in the physical stores. One can only imagine that states will shift their thinking as well. It seems inevitable that Congress will try to lay the foundation for some type of national online tax. Until then states will get more aggressive in their mission to get more and more sales tax revenue from the online retailers. It will be interesting to see how creative states get this year.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law Moffa, Gainor, & Sutton, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone at 954-642-9390. Please also visit his other sales tax blog, facebook, and Twitter

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