Stealing From the State

Over the course of the Black Friday weekend U.S. shoppers spent roughly $57 billion. Although it’s down from last year by roughly $2 billion, it’s still a lot of money.

On Cyber Monday, consumers plunked down another $2 billion, up by $400 million from 2012. And this is just the beginning.

By the time all the presents are unwrapped, turkeys and pies eaten, and trees put out by the curb for recycling, Americans are expected to have spent $230 billion in just five weeks.

Retailers earn 40% of their sales in this short time frame. And many of us never cast a shadow in the doorway of a store. We shop online.

Research company Forrester estimates that a full third of all holiday sales will be online, amounting to $78 billion. This is another double digit annual gain for online sales, which leads me to just one question…

What in the world is everyone else doing?

Where are the other two thirds?

Seeing the pictures of Black Friday, with people pressed up against the outside of store windows like some scene from the zombie show The Walking Dead, who really wants to go to a store and be part of that?

I’d imagine that there are some gifts that must be purchased in person, but so far no one on my list of recipients has had a request like that. At least, I haven’t seen an item requested that I think is important enough to warrant a trip to a store.

I shop online, almost exclusively, and not just at Christmas. It’s easier, the selection is bigger, there’s no teenaged sales clerk standing nearby, busily NOT helping me, and usually it’s cheaper. Although that last part is about to change.

It’s said that as California goes, so goes the nation. While I generally take issue with that, it appears to be the case when it comes to taxing Internet sales.

The states of California and New York just won a court battle with Amazon and other online retailers regarding the collection of sales tax. Through their operations with partner firms, the online retailers were deemed to have places of business in the states and are therefore required to collect sales tax on all transactions in those states.

The retailers appealed to the Supreme Court, which refused to hear the case, thereby handing victory to the states.

It took a long time, but this is the way it should be… at least given the way voters have set up the system in most areas.

Most states – as well as cities and counties – charge a sales tax. It’s the way the legislatures around the country chose to finance their governments. Many “new” ideas about taxes, such as the Fair Tax, are based on the same idea. Those who consume versus save should pay.

Whether the sales tax is right or wrong is not the point, it’s simply the current state of law. However, online sales slipped through a loophole starting back in 1992. The courts found that online retailers did not have a presence in all locations, so they could only be expected to collect sales tax in the state in which they had a physical location.

Note that the law did NOT say no sales tax was due. That’s not the case. In fact, anyone in a state that collects sales tax, who purchases something online and no tax was collected, is responsible for declaring the tax due to their home state… and paying it. But almost no one does. So states get short changed.

In 1992, the level of Internet sales was small. That’s changed some. Just a glance at the numbers above will give you an idea of how much is at stake. With $78 billion in online sales this holiday season, a tax of 7% (the rate in Florida) would generate $5.46 billion in sales tax. That would pay for a lot of teachers, roads, bridges, etc.

I’m not sure what angle the different states will take to force online sellers to collect and remit sales tax, but I’m certain it will happen. So as I peruse the various gifts that I’m buying online this year, I’m aware that it might be the last holiday season where no tax is collected on my purchases.

I’m OK with it, since I was not shopping online to avoid the sales tax. I was shopping – and will continue to shop – online in order to avoid the hassles of parking, shopping for what’s not available in the store, and the inevitable lack of service. The absent sales tax was just a bonus.

For the states, this is becoming a monstrous problem that will only get worse over time. The current crop of big spenders – the Boomers – increase their online spending each year, but the young set lives online.

As the Echo Boomers take over the position of top spending cohort in the years to come, the states want to make sure they’re in line to receive their share!

Rodney

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About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.