A look at the Collection of Sales Taxes

Interesting column in Internet Retailer looking at the reaction of online retailers to the potential overturning of the SCOTUS 1992 ruling in Quill Corp. vs. North Dakota.  For those who are not familiar with the ruling, Quill Corp. vs. North Dakota was the Supreme Court ruling that said businesses without a physical presence in a state did not have to collect sales tax from customers who lived in that state, effectively preventing states from collecting sales tax on mail order and online purchases. The ruling was based on the Dormant Commerce Clause of the Constitution, which prevents states from interfering with interstate commerce unless specifically authorized by the United States Congress. Since Congress had not passed any laws dealing with the situation at the time, the court determined that Quill did not have a “substantial nexus” or connection to North Dakota and was thus exempted from collecting  and remitting sales or use tax to the state. However, the Court did explicitly state in its ruling that nothing prevented Congress from passing legislation to deal with the situation. Since, internet commerce was in its infancy at the time, with sales amounting to less than 1% of all retail sales, and the Congress has never met a situation it did not want to kick down the road until it became absolutely imperative to deal with it, Congress passed on developing any legislation to authorize states to collect sales tax from internet companies without some physical location in the state.

However in 2015, in his concurrence to the Court’s ruling on Direct Marketing Association vs. Brohl,  Justice Anthony Kennedy wrote about Quill’s “Tenuous nature” and the “serious continuing injustice faced by Colorado and many other States”, offering the states an opportunity to forcing “Kill Quill” suits by passing legislation compelling out of state vendors to collect and remit sales tax, forcing the vendors to bring lawsuits attempting to overturn the legislation. The states then expect these lawsuits to provide a legal vehicle to move the dispute back to the Supreme Court, revisiting and, the states hope, overturning the ruling. So far, the states’ plan has worked with argument of South Dakota v. Wayfair Inc. before the Court scheduled for this April .

Some of the comments from online only retailers in the column noted at the top really struck me, especially this one, in the light of the increased use of MAP in the gaming industry, by Deb Beresford, ecommerce manager at web-only sunglasses retailer X-wear.com:   “In the last two years, many of the sunglasses brands that we sell have changed their policies to require their retailers to maintain minimum advertised pricing. Because we can no longer discount most of these sunglasses, we lost huge revenue on the marketplaces where we list our products. The only reason I believe we capture any out of state customers is because they don’t have to pay sales tax. It’s very hard to find an edge in this market now without the courts taking away the one thing that gives any of us a fighting chance” and this one from Atinc  Sonmezer,  CEO of dancewear retailer MissbellyDance.com:  “ It will be very costly. I’m not sure how small businesses selling on Amazon nationwide will be able to handle it.”

Even Congress will probably move on this. I spoke with my House Representative this week and he said online sales tax reform was the number one topic mayors in the cities in his district wanted to discuss. We will see what happens but I expect to see some legislation dealing with the situation in the next year or three.

Barnes and Noble Layoffs

February of 2018,  Barnes and Noble laid off some 1800 full time employees, many of which had worked for the bookseller for over a decade. Just about every store lost 3 to 7 full time people:

On Monday morning, every single Barnes & Noble location – that’s 781 stores – told their full-time employees to pack up and leave. The eliminated positions were as follows: the head cashiers (those are the people responsible for handling the money), the receiving managers (the people responsible for bringing in product and making sure it goes where it should), the digital leads (the people responsible for solving Nook problems), the newsstand leads (the people responsible for distributing the magazines), and the bargain leads (the people responsible for keeping up the massive discount sections). A few of the larger stores were able to spare their head cashiers and their receiving managers, but not many.

Just about everyone lost between 3 and 7 employees. The unofficial numbers put the total around 1,800 people.

In business, the easiest thing to cut when you run into trouble is payroll. Payroll is usually the largest of a store’s variable costs and, since most people in retail get paid by the hour,  the most variable. Hence, payroll proves a very tempting target when costs start ballooning and something in the budget needs to get cut.  Unfortunately, by doing so, especially by getting rid of the people who have been here the longest, and generally have the highest pay and benefits.  Back in 2009, Circuit City followed a similar path, cutting payroll and moving full time employees to part time positions. That didn’t work out so well. The problem with cutting your full time positions is that those are the people who have likely been with the company the longest and know the most about how the company works and the products or services that it sells. Getting rid of them eliminates decades of institutional memory from the organization. Then, offering to bring them back in a part-time position does not engender any positive feelings towards the organization by the said employees.

People can get almost everything that Barnes and Noble sells online more cheaply from Amazon or another online reseller. What they cannot get from Amazon or other online resellers is a pirate reading stories to their children or someone to teach their children to play Pokemon. Retail is moving to the experiential model wherein they must provide an experience for the customer in addition to products to purchase, even if it is just something for the customer to look at while they are taking time to shop in the store. Our store does it with large amounts of out of print merchandise for customers to look through and appropriate videos playing on the store television. St. Louis Fantasy Shop did it some years ago with a Lord of the Rings display I still remember. Prop replicas surrounded a dvd player that continually looped the Lord of the Rings movies and a sketching area where budding artists could practice drawing comic artwork. It takes a committed and creative staff to come up with interactive displays like that to keep customers coming back. Cutting staff is a great way to eliminate them.

Looney Labs Pyramid Arcade Sales Policy

Looney Labs, the publisher of myriad editions of Fluxx, just announced a new sales policy for their upcoming Pyramid Arcade game. Essentially, the new policy does not allow online sales of Pyramid Arcade by any online retailer that does not have an agreement with Looney Labs .  Already, Looney Labs has posted a list of about 2 dozen online retailers not allowed to sell the game.

Death and Taxes (Well, Taxes)

Following up on the last post about Amazon and taxes, the whole argument Amazon and other online merchants make about the difficulty of collecting sales taxes from and remitting them to hundreds of thousands of localities does not hold water.  As this article points out, Amazon has had software in place since 2008 that calculates sales tax for all merchants using the website as a storefront from which to sell.  Any issue of Direct Marketing News also advertises software that will calculate sales tax for any location in the US.  Granted the software might be pricey for a smaller online retailer but collecting sales taxes nationally is feasible.

A more fundamental obstacle comes from people's misunderstanding of the nature of sales taxes.  45 states, the District of Columbia and Guam all collect some form of sales tax. In those states, the sales tax provides the largest amount of funding for services offered by states and communities.  The first misunderstanding comes when people, and even some stores, refer to stores "charging" sales tax.  Stores do not charge sales tax, stores collect sales tax.  Stores that collect sales tax have been designated by the tax collecting authority within the state with the responsibility of collecting sales tax on items sold at retail and remitting the tax collected to the state (Items purchased for resale are exempt from sales tax).  In some states, the store receives a percentage of the sales tax as payment for performing the collection, in other states, the total amount goes to the state treasury.

The second misconception is that because a business does not collect sales taxes, that somehow exempts the purchaser from owing the taxes.  This is plain wrong.  In Quill vs. North Dakota, the Supreme Court ruled that businesses "without a physical nexus" within a state were exempt from the requirement to collect sales taxes from customers within that state.  That ruling did not exempt the customer from paying the sales tax to the state.  This is often called a "use tax" and there is usually a line to pay the total use tax on a state's income tax form, assuming it collects one.  In practice, few people pay the use tax and collecting it is so time consuming that most states forgo chasing after it, leaving lawyers and tax attorneys the primary ones who pay it, costing them about $23 billion per year.  About a decade ago, Illinois made a concerted effort to collect unpaid use taxes but wound up spending almost as much in the attempt as it collected.  The Marketplace Fairness Act, passed by the Senate but likely going nowhere in the House of Representatives would overturn Quill and require online and mail order retailers doing over $1 million to collect and remit sales tax from all customers.

A third misconception, and this is one that was repeated by the COO of Amazon, Nathan Bennet so he either really does not understand how sales taxes work or is deliberately ingenuous about the topic, is that online and mail order businesses should not collect sales taxes from a remote customer because the business gains no benefits from the tax.  This, of course, is simply wrong since the tax is collected, not for the benefit of the business, but for the benefit of the customer.  The funds generated by the sales tax are designated to fund projects in the community and state where the customer resides, not to benefit the business that collects them. The business serves as the most efficient conduit through which the sales tax money flows and, in many states, having a license to collect sales taxes is a requirement for doing business (also a requirement for opening an account with many distributors).

Of course, as I noted in the last post, the direction Amazon plans to take will give it physical nexus in all 50 states, requiring it to collect and remit sales taxes, like Wal-Mart, Staples, Barnes & Noble, etc., regardless of Quill, which is why now the company supports requiring online retailers, including itself, to collect (and remit) sales taxes.  Amazing how your viewpoint changes when the new vantage point benefits you.

Modern Masters Demand

Well, only 2 more days until Modern Masters for Magic releases.  The demand for this set has been greater or at least more widespread than any thing else WOTC has released, even the From the Vault or Commanders' Arsenal sets.  Those had big demand, but it was all local, with repeat customers preordering a set and wanting to know if they could buy a second.

With Modern Masters, we still had strong local demand but this is the first time I remember people from outside the area contacting us to see about ordering displays of the set. We have calls and emails from Pennsylvania, New York, California, Texas and even one email from Europe (Nope, we didn't sell to any of them, all of our boosters will go to local customers).

GateCrash Sales

We got in quite a stack of GateCrash boosters, Fatpacks and intro decks on Thursday.  Friday, the set launched and by 7 p.m. we had sold down about 2/3 of the pile.  Today was our best non-holiday season sales day ever.