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Online Shopping

by Joshua Brustein, Dec 13, 2004
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When my iPod portable music player was swiped on the N train one evening last month, I was left with a need to replace one of my more valued possessions.

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There was a choice: I could go to the Apple Store on Prince Street, spend $399 and walk out of the store with my purchase in my hands, or I could go online from my apartment in Astoria, spend $394, and wait for PC Connection, an online computer store, to ship it from New Hampshire.

At first blush, the decision seemed to be that I could wait a week or spend $5 extra. But since PC Connection doesn’t charge New York residents sales tax, the difference in price was actually closer to $40.

I decided not to go downtown.

For various reasons, an increasing number of people are buying their iPods - and their dress shirts, their laptops, and their paperback novels - online. According to Jupiter Research, Americans will spend $65 billion on online retail purchases nationwide in 2004, four percent of the total retail sales for the country. They will spend $10 billion on personal computers, $7.5 billion on clothing and accessories, and $3.6 billion on personal electronics.

By 2008, the total will be $110 billion.

New York’s businesses are finding that online shopping poses advantages and challenges; it has also begun to raise some real policy issues.

SHOPPING AS AN "EXPERIENCE"

If online retailers have the advantage of convenience and, often, lower overhead, New York's "brick-and-mortar" stores have not lost their special appeal. There's cachet even in a shopping bag from a New York store.

“Any tourist coming into New York, they like to shop, but they also like to carry a nice bag, knowing that they actually have completed a purchase in New York City,” said Ivan Cardona, president of professional shopping service Lush Life Concierge. “That says a lot about vanity, and a lot about image, the need for fulfillment: the fact that we went in there, we purchased something, and we walked out with a bag.”

Perhaps in part as a response to the rise in online shopping, new stores like the Apple Store and NBC Experience are more like theme parks than traditional shops, so that the purchase is only one part of the whole experience. (Indeed, in the new Times Warner Center mall, "the Samsung Experience" is all experience and no purchase; their cell phones, MP3 players, video cameras, flat-screen TVs and other high-tech gizmos are all on display, but not for sale). But at the same time, even the best-known New York stores are going online, offering their New York image to shoppers far away. Tiffany’s and other luxury Manhattan businesses are reportedly doing an increasing amount of business through their Web sites.

Most online vendors nationwide have at least some presence in New York. But many of New York’s brick-and-mortar retailers believe that those that do not – like Amazon.com – have one unfair advantage: the ability to get around collecting sales tax. This amounts to a price difference that many see as a de facto subsidy, and some retailers are looking to the government for help:

“It’s only right that if you buy something on the Internet or through a catalog you pay the same sales tax that you do if you buy something on the street,” said Ted Potrikus, executive vice president of the Retail Council of New York State, a trade organization.

LOSING TAX REVENUE ON ONLINE PURCHASES

While customers may find online shopping more convenient and cheaper, state and local governments have discovered at least one major drawback: the loss of tax revenue. According to a recent study (in pdf format) by two professors at the University of Tennessee, New York lost $1.1 billion in state and local tax revenues in 2003 by failing to collect sales tax for online purchases; the study estimates that the state’s annual loss will rise to $1.6 billion by 2008.

New York is legally entitled to this money, but does not have the power to force certain Internet businesses to collect sales tax from their customers. This is the result of a 1992 Supreme Court decision on whether states could force mail-order retailers to collect local sales tax when selling to out-of-state customers. These businesses argued that it was too burdensome to calculate the sales taxes for the thousands of different jurisdictions where their customers lived, and the Supreme Court agreed. It ruled that unless a business had a physical presence in a state, it did not have to collect that state’s taxes.

So the burden of collection falls on the purchasers themselves. Technically, New Yorkers are required to pay a "use tax" on items purchased online but used in New York State, just as they are supposed to write a check to the state for the taxes they owe on furniture that they drive back from the Ikea in New Jersey.

This is not the most widely respected of responsibilities

"The only people I know who [pay this tax] are people who have had jobs as tax commissioners or something like that," said Marcia Van Wagner, the chief economist at the Citizens Budget Commission. "For the most part, normal people don’t do it, and how do you enforce it?"

HOW DO YOU MAKE PEOPLE PAY THE SALES TAX?

New York loses more from uncollected Internet taxes than almost anywhere else - last year only California and Texas lost more. But as a percentage of its tax base, it loses less than any other state. This is partially because New York’s economy is less reliant on sales tax than many smaller states, and partially because so many Internet retailers are located within the state itself.

Until recently, New York State has not made a big effort to collect this lost revenue, but the amount of money involved in the rise of Internet retail has sparked new attempts to do so. As part of the 2003 budget, the state legislature added a line to the income tax return form asking New Yorkers to estimate their online purchases and pay the appropriate amount of sales tax.

The state does not yet know how much money this will bring in, but there is a wide consensus that it alone will not do nearly enough.

A recent report by the Citizens Budget Commission (in pdf format) described better enforcement of the use tax as "the least harmful and most sensible tax measure" available to the state, and estimated that it would mean between $40 million and $590 million in annual tax revenue for New York.

"However, implementation of this change depends on cooperation with other states and development of interstate enforcement capacity," read the report. "Significant new revenues are unlikely for a few years."

To deal with this problem on a national level, a group of over 20 states have formed the Streamlined Sales Tax Project, which would coordinate state and local sales taxes, making them easier to navigate and thus removing retailers’ arguments that collecting sales taxes for so many jurisdictions is too complicated. This would pave the way to overturning the 1992 Supreme Court decision.

New York has agreed in principle to join the project, but the legislature has not yet officially approved it. Potrikus hopes that the state’s worsening fiscal standing will provide the inspiration to do so.

"Budget deficits," he said, "are the mother of invention."


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