The Inevitable National Sales Tax in America

With more and more American retail spending happening online and not in bricks and mortar outlets, a previous cash cow of American towns has gone the way of, well, many retail chains. Montgomery Ward, Circuit City...the list of outlets that have found their way to the Great Mall in the Sky is long. Building shopping centres used to be an American local government pastime designed to generate sales taxes for revenue. But, with the shift to online shopping and a generally shopped out populace, things are not what they used to be. Let's begin with the increasingly desperate "you build it, but the shopper don't come" scenario care of the WSJ:

Municipal sales-tax receipts have declined in six of the past 10 years, compared with the year before, according to the National League of Cities, including drops of 6.6% in 2009 and 5% in 2010. That has city leaders from Texas to California waking up to the likelihood their sales-tax decline isn't just a result of the bad economy. Instead, it is problem that will persist after a recovery, as demand for retail complexes is whittled by online shopping and the waning popularity of the big-box store selling everything from groceries to electronics.

"I am not sure cities can go back to playing the retail game the way they have over the past 25 years," said William Fulton, mayor of Ventura, Calif., and editor of the California Planning and Development Report newsletter. For decades, cities have engaged in an escalating competition with their civic neighbors to encourage the building of bigger and bolder shopping palaces—often with public subsidies—to enlarge their coffers.

It was a recipe for sprawl, pure and simple. What to do? As you would imagine, pressure is in turn growing from states to apply sales taxes to online retailers. Another recent article in BusinessWeek suggests that, actually, Amazon in particular would still charge less than stores with a physical presence do even if a national sales tax was applied. End result: it would end government pressure for it to do so while presumably not having much of an impact on its business:

There's a growing sense among state and federal lawmakers that the online sales-tax reprieve, once meant to support and nurture a fledgling industry, constitutes an advantage that Amazon, with 90 million customers and $34 billion in annual sales, no longer needs. Over the past year an escalating war over online sales taxes has spread to Texas, Connecticut, California, and dozens of other states. Later this month the battle will reach Capitol Hill. Senate Majority Whip Dick Durbin (D-Ill.) says he plans to introduce a bill, called the Main Street Fairness Act, mandating that all businesses collect the sales tax in the state where the consumer resides.

Such measures have been proposed and disregarded by Congress for years, but Durbin believes the winds are shifting. "This idea is overdue," he says. "Online retail sales are now very fulsome and are growing at the expense of local units of government." Many state budgets are bleeding red, despite some recent revenue upswings around the country, and Internet sales-tax revenue has the gleam of found money. In many states, customers are supposed to declare their online purchases on their income tax forms but rarely do. A University of Tennessee study recently estimated that states will collectively lose $10.1 billion in uncollected online sales-tax revenue this year and $11.3 billion next year.

And then there are the studies that suggest Amazon has little to lose from finally giving in on collecting these sales taxes:

Actually, being forced to collect sales tax may not turn out to be so bad for Amazon. Analysts at Wells Fargo Securities (WFC) recently surveyed a range of products and found that even without factoring in sales tax, Amazon's prices were, on average, 5 to 6 percent lower than Wal-Mart's and 12 to 13 percent below Target's. And without having to worry about sales-tax consequences, Amazon will be able to freely add shipping centers near every major city and accelerate its push toward delivering products overnight, or even on the day they're ordered. "Each year that passes, the relevance of sales tax to Amazon's success is less and less," says Morgan Stanley (MS) analyst Scott Devitt, who notes that the company keeps getting more efficient as it gets larger. "If you look five years out, when there's probably a policy in place, it's possible Amazon will be better off for it. That's not something I would have said before."

I am of two minds about this. Having been a longtime beneficiary of having friends and relatives visiting or living in the United States bring back things for me purchased online, retail prices there remain the lowest for consumer goods anywhere in the world. It's a fascinating application of modern world systems theory how things made in LDCs for export to markets alike the US actually cost less than buying them in LDCs or regions they were made in.

Still, I believe this situation may not last for much longer of not having a unified sales tax that could be applied to online outlets given the bedraggled finances of US local governments up and down the United States. Local governments are in no better shape than that at the federal level, to say the least.