It’s Time To Tax Internet Sales

This week’s Courier Herald column:

JCPenney, once among the nation’s largest and proudest retailers, announced last week that it would be closing an additional 138 stores nationwide. Five Georgia stores, including those in Dublin, Macon, Milledgeville, Thomasville, and Tifton will be shuttered.

While JCPenney has had recent struggles trying to define its brand and marketing mix, it is not an outlier in the retail landscape. Macy’s announced in January that it is closing 68 stores nationwide including their Athens location in Georgia Square Mall. Sears Holdings, which operates both Sears and K-Mart stores, is also planning on 150 store closures this year, including Georgia locations in Columbus, Cornelia, Kingsland, and Savannah.

The trend against many established big box retailers is strong, and appears to be growing. There are also signs that it’s not just department stores experiencing capacity issues. A recent Atlanta Journal Constitution report suggests that the metro area may have too many grocery stores.

While some of the closures are due to newer, smaller, and more nimble competitors entering the market, it’s now also easy to see a broad shift from large brick and mortar retailers to internet sales channels. The days of the internet being a new fragile frontier of commerce are over.

Customer acceptance of ecommerce has changed shopping online from a quirky novelty to the major driver of consumer sales. With the integration of retailers’ websites into smartphone apps, each of us now walk around with access to anything we want at any time, right in our pockets.

Amazon, which began with books and expanded to dry goods and apparel, is now offering grocery staples and even fresh produce through its distribution channels. Restaurants are not without competition as well, as a broad band of companies marketing prepared cook at home meal kits are aiming to stem the trend of eating out versus cooking at home. Their pitch? Ship all the ingredients for one meal in a box together, so that busy people like us can skip the traffic and hassle of going to a grocery store.

What does all of this mean for those of us here in Georgia? Those who shape policy are going to have to quit treating internet based commerce as a novelty and understand it is an established and permanent part of our economy.

The biggest policy change must come from Washington, where policy makers will need to create a nexus that allows for sales tax collection by states of internet commerce transactions. Georgia is able to collect sales taxes from companies that have a physical presence in the state. That takes care of the larger e-tailers like Amazon. But many smaller and growing specialty sites are able to take sales away from struggling retailers and no tax is paid on the transaction.

Those that write Georgia’s tax policies are aware of a desire (at least from a large and motivated cross section of their Republican base) to lower income taxes and shift the tax burden to a broadened sales tax base. A bill before the legislature and expected soon on the Governor’s desk will lower the state’s top income tax rate from 6% to 5.4%.

Those that demand the shift to a broadened sales tax base like that part of the plan, but many then form cognitive dissonance when leaders attempt to do the other half of the policy and broaden the base. The internet and its retailers are the clearest part where the base must be extended, because these are sales that formerly made up our tax base, but many now are not.

There’s more to the shift to internet commerce than just marginal tax collections. With many mall retailers and strip center anchor tenants closing, there is a direct effect on local property tax collections. A mall without one of its anchor tenants is less valuable, and thus lowers property taxes. According to a recent report by CNBC, a mall that loses two of its anchor tenants often triggers clauses in smaller tenants’ leases allowing them to lower rents or vacate the property, causing a further decline in property and sales taxes, as well as the number of local jobs available.

A national move to tax internet sales will neither “punish” e-commerce nor have the government “pick winners or losers”. Quite the opposite. Right now, the internet loophole is providing an incentive to online retailers at the expense of those who invest and create jobs in our local communities.

A change will level this playing field. It will not stop the internet from growing nor stem the tide of older, out of touch retailers closing. But it will return equal market forces to the competition between the two, while also ensuring there is a sufficient sales tax base to continue the shift from an income-based to sales-tax based tax policy.

Author: Charlie

Publisher of UGA & GSU degrees in Economics Executive Director for PolicyBEST Interests are public policy solutions in Education, Science & Medicine, and Transportation that keep GA competitive and a great place to live.

11 thoughts on “It’s Time To Tax Internet Sales”

  1. How to do it though? Sales tax is normally based on the address the merch is shipped to. So every little retailer has to have instant access to every tax jurisdiction in the country.

    If I understand correctly, we already have a system in place here. If you buy something and don’t pay sales tax you are obligated to pay a “use” tax. But that is, for all intents, a voluntary process as it is virtually impossible to track and collect. Perhaps there is a way to improve that.

    1. I always thought it was address shipped FROM. Thats why stuff shipped from a Georgia location has sales tax while one from out of state doesnt. The problem as I see it is that there are so many local sales taxes in addition to state taxes there is no way I can think of to be able to collect it all.

      1. I don’t think stuff shipped from Georgia is normally taxed unless it is shipped to another location in Georgia. In which case you would need to determine the tax rate in the county it was shipped to. See form ST-3.

        “Sourcing: Generally, sales sourced to a jurisdiction include all sales of property in which the
        property is delivered to the purchaser in the jurisdiction and sales of services that are performed
        in the jurisdiction. Please refer to O.C.G.A. § 48-8-77 for specific sourcing rules.”

        There may be very diligent companies in Georgia who determine the sales tax rate in out of state jurisdictions, but I doubt there are very many.

        edit: If you have a walk-in customer, the sale is delivered in your own (store) jurisdiction, so your local sales tax rate would apply.

  2. Three positive initiatives from the legislature this year concerning taxation.
    1. Increased emphasis on collecting sales tax on internet sales
    2. Lower the income tax to 5.4%
    3. Eliminate the annual sales tax holiday for school stuff.

    Now let’s see if they become law. Deal, a “fair tax” supporter in congress, may or may not agree.

  3. Truly though…when was the last time any of you went to a mall? I’ve been once in the last 5 years (to Lennox) and it was under protest. I had to meet my parents there (they were staying at the JW) and my Mom wanted to get something there.
    As for JC Penney, yes it is sad to lose a piece of Americana, but in reality they and other bix box retailers just failed to adapt. I dont think taxing internet sales was a big part of that. Sears is even sadder. It had some really good brands (tools), and it has been GROSSLY mismanaged. I think with the right strategy 10 years ago they might have survived…not so much now.
    The other thing that gives online purchases more value is the time cost. Ordering online and delivered to your door. No cost for time to go to the store and back or fighting traffic. If you think about what an hour of you time is worth (or how much you get paid per hour) its even that much cheaper to purchase online. Etsy has been a great tool for those of us who embraced it (for me back in 2008). I could never have had the kind of sales I have without it. I also would have no clue how to charge sales taxes either with an e-commerce sight

    1. The problem with brick and mortar is that you have to compete with anyone and everyone who is having a sale anywhere all the time. If you can’t compete with that, if your business is based on people coming in to try things on, or touch them before they buy them, then you are screwed.

      I used to feel bad because I would go to a store to try out motorcycle gear and then go online to buy it for 30% cheaper. But then I realized that the store needed to be the online source that I bought from too if they were going to survive.

      Even so, certain retailers like amazon manage to attract mega financing and can lose money for 20 years without going under. Hard to compete with that.

    2. Notice that it’s not all malls that the JCPenney stores are closing in. It’s their marginal stores. And that’s where changes in all economic models happen and what economics studies: At the margin.

      Yes, some stores have flawed models. Sears/KMart may liquidate completely by the end of the year. But the overall point is this: Malls may in fact be yesterday. The internet IS tomorrow. (Also, today). We need a tax policy that captures commerce where it happens if we’re going to use sales tax as a major tax base. To do that, you’re going to have to have a national model that allows for/requires collection. The US government can control imports/exports, and from there they have the power to regulate interstate commerce, which would allow them to collect taxes from out of state and even out of country retailers, then distribute it to the state of sale (where nexus in sales tax occurs).

  4. Brick and mortar retail represents a boatload of jobs. There will never be a time when they are gone completely but I don’t think many people realize what the full impact of the internet may be on said jobs. Giving a relatively arbitrary advantage to internet sales is not necessary.

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