November 14, 2011

Internet Sales Take Toll on Local Retail

Print More

Patti Tepper-Rasmussen doesn’t have to wonder whether her Oklahoma City toy store is losing business to the Internet. She knows for a fact.

“People will tell me in the store,” said Tepper-Rasmussen, whose Learning Tree Toys, Books and Games, Inc. has been an Oklahoma City fixture since 1985. “I’ll get someone who will tell me, ‘Well, I can get this online from such and such, and I don’t have to pay the tax.’ Then I’ll watch them walk out of the store.”

Competition doesn’t bother Tepper-Rasmussen. The lack of “a level playing field” does.

“Online companies aren’t required to collect state and local taxes,” she said. “We are. How can we compete with that?”

Voices like Tepper-Rasmussen might be finally gaining traction as cash-strapped states dig deeper for potential revenue streams, scouring over antiquated tax credits and other exemptions. Internet taxation has been debated nationwide since the Internet’s inception, but as online sales have steadily increased, more Oklahomans have started to question whether remote venders should be held to the same standards as the state’s brick-and-mortar businesses.

Detractors – mostly conservatives – argue the collection of Internet taxes is simply another way of saying, “new tax.” They oppose such an action as was evidenced in April when the State House defeated Senate Bill 744 – a measure that extended Oklahoma’s involvement in an interstate compact that used the Streamlined Sales and Tax Agreement model to collect taxes due from direct mail.

“The Internet sales tax issue is a cut-and-dry one,” said Rep. Mike Reynolds, R-Oklahoma City. “You either violate the U.S. Constitution by collecting a tax or you don’t.”

As for those who decry the lack of fairness in competing with tax-free, online sales, Reynolds said matter-of-factly, “Whining isn’t a good reason for violating the U.S. Constitution.”

Jerry Johnson, vice chairman of the State Tax Commission, is one person intimately familiar with the issue. Johnson served on an advisory committee for the University of Tennessee’s 2009 study that estimated the amount of e-commerce sales tax dollars lost annually by each state.

The State Tax Commission has since used the calculation model of the study, added additional data, and arrived at its own estimates for Oklahoma.

“Our best estimate for Oklahoma is that we’re losing between $185 and $225 million a year in state and local sales taxes,” Johnson said.

The estimates represent about one third of the state’s deficit.

Oklahoma’s total estimate of e-commerce transactions is even more jarring. Based on the study, Oklahomans conservatively spent more than $2.9 billion over the Internet in 2007. That number is projected to swell to more than $4.5 billion by 2012.

“We’ve seen more activity on this issue in the last several months than we have in recent years,” said Johnson, referring to a newly proposed federal bill and the most recent developments surrounding Amazon.com.

In September, Amazon.com reached an historic agreement with California state officials to begin collecting and remitting sales taxes in 2012. Amazon.com also collects sales taxes in Kansas, Kentucky, New York, North Dakota and Washington.

In October, a bipartisan bill was introduced in Washington, D.C. – H.R. 3179, or the “Marketplace Equity Act of 2011” – by U.S. Representatives Jackie Speier, D-California, and Steve Womack, R-Arkansas. The bill essentially grants states the authority to require out-of-state retailers to collect sales taxes from in-state purchasers.

Federal law presently requires a vendor to have “a presence in a state” before sales taxes can be collected. The legal debate has therefore raged around a remote vendor’s nexus, or connection to any given state.

In Oklahoma, Internet taxes are thus collected and remitted on a voluntary basis. Johnson said the system in place collects around $14 million annually – a fraction of the estimated “$185 to $225 million” Oklahoma is losing in sales tax revenue each year.

“I think what people need to remember is this isn’t a new tax,” Johnson said. “These are taxes already owed, but have simply gone uncollected.”

Reynolds vehemently disagrees, describing the collection of an Internet sales tax as “a new sales tax.”

Book store owner Joanie Stephenson of Tulsa brings up another important aspect to the debate.

“Internet retailers aren’t required to collect sales taxes like we do,” said Stephenson, who owns Tulsa’s iconic 64-year-old soda fountain, Steve’s Sundry, Books and Magazines. “That ultimately hurts the city as a whole. As more and more people purchase items over the Internet because they don’t have to pay a sales tax, that’s more and more money that’s not going to our city to pay for roads and police and fire …

“I don’t know why it’s so hard for some people to see. To me, it’s not a political issue. It’s just good business.”

In January, Oklahoma City Mayor Mick Cornett told President Barack Obama in a White House meeting that cities were being hurt by tax-free sales on the Internet. Cornett estimated that Oklahoma City was losing as much as $15 million annually in potential sales tax revenue to online sellers.

The $15 million would represent roughly 10.5% of the Oklahoma City Police Department’s 2011-2012 budget.

Mostly, business owners claim its chipping away at Oklahoma’s main streets, thus giving rise to advocacy groups such as Stand With Main Street. In some department stores, evidence of the battle can be seen in plain view with signs that warn customers not to take pictures of the merchandise.

“Cellphone technology has become so sophisticated, customers can literally take a picture of a tag on the merchandise and have the item ordered online before they ever leave your store,” Tepper-Rasmussen said. “Of course, they don’t have to pay the sales tax. I’ve seen people take pictures with their phones, but what can you do?”

One Edmond business owner claims the disadvantage of competing with tax-free retailers on the Internet might even put her jewelry and clothing store out of business. The owner has been in the same downtown district for nearly three decades.

“The Internet is killing me,” said the owner, who asked to remain anonymous. “I’m just afraid to say anything publicly for fear of losing more customers, but I’m not alone. How are we supposed to compete with tax-free retailers online? I’ve seen it in my store. I had one customer come in and ask if I could order her a coat. So I did. When I called to tell her the coat had been ordered, she said she didn’t want it any longer. She found the coat online and ordered it because she didn’t have to pay any sales tax.

“So I was stuck with a coat.”