Thursday, April 26, 2018

Internet Sales Tax: A Game Changer?

Have you been paying sales tax on your online purchases?

A 1992 US Supreme Court ruling says that a state can only require a retailer to collect sales taxes if the businesses has a physical presence - a store, office, distribution center - in that state. Therefore, if an online retailer is not required to add the tax, the consumer is still expected to remit the sales tax that should have paid to the resident state in the form of a use tax. Most states include a line their income tax forms where they ask you to declare any use tax you might owe on such purchases.

For obvious reasons, that doesn’t work very well, and the 45 states in that situation have been pushing Congress to address that ruling. According to the National Governors Association, these states maintain that they could collect an estimated $26 billion annually in sales taxes on products sold online and via mail order. Although Congress has addressed the subject of internet sales tax collection from time to time, there has never been a serious attempt at taking it to a vote. But things may change very soon.

A recent case involving the State of South Dakota v. Wayfair Inc. is now in the hands of the Supreme Court. The case revisits the 1992 Supreme Court rule. This standard is outdated, South Dakota’s attorney-general told the justices, and deprives states of “massive sales tax revenues that we need for education, healthcare and infrastructure”. On day one of the Supreme Court debate, justices expressed concern that allowing states to reach outside their borders to collect sales taxes could create messy legal questions and endless litigation, with some saying it would be best for Congress to resolve the matter.

While states potentially have much to gain here, it is questionable how much brick-and-mortar retailers do. It has long been the belief that online retailers have a distinct pricing advantage compared to their brick-and-mortar competitors. The online advantage wasn’t so attractive years ago when shipping charges more or less offset the tax-free advantage. However, as Amazon and others began offering free shipping, internet pricing became much more appealing to consumers. And thus began the snowball effect, the substantial shift of shopping patterns from brick-and-mortar to online purchases. But when it’s really broken down, is too much being made of the adverse effect that tax-free internet shopping has on brick-and-mortar?

There’s no question that lower price is a frequent response when consumers are asked why they prefer to shop online. But is sales tax really a factor? It’s highly doubtful.

First of all, any large retailer with a physical presence in a state is currently charging sales tax now on an online purchase: Walmart, Target, Macy’s, Kohl’s, JCPenney, Home Depot, Lowe’s, Best Buy, Costco, CVS, and Nordstrom all are. And Amazon taxes shoppers in every state where applicable. The argument put forth on behalf of brick-and-mortar retailers by the National Retail Federation is largely that Congress should support the little guy and level the playing field so that all sellers play by the same sales tax rules. But in the ever-changing world of omnichannel retailing, small sellers need an online presence as well.

Whether the Supreme Court does it or it’s handed back to Congress, a change in the sales tax rule should be deliberated very carefully. If small retailers with both a physical presence as well as an online platform are required to collect sales tax for online purchases, will they have the wherewithal to get it done? It could be that burden, and the expense, are too big to bear. Consequently, a change in the online sales tax rule may be just the thing that drives some of these smaller retail firms out of business.

It may well be that a substantial change in the state sales tax rule would turn out to be a game-changer for brick-and-mortar retail – but maybe not in the way they hope.

Bob Sheehan, VP of Research
BSheehan@KeyPoint Partners.com



The KeyPoint Reports for 2018:
coming soon!

National News

US consumers bounced back in March and bought more cars, furniture and appliances after three months of declining retail sales. The Commerce Department says retail sales rose 0.6% last month, the largest increase since November. Auto sales jumped 2%, the most in six months. Sales rose at grocery stores, restaurants and bars, and drug stores. They fell at home and garden stores, clothing shops and sporting goods stores. Retail sales were expected to bounce back in the spring after a pause in spending following the holiday season. What’s likely to keep the spending going in the months ahead are rising incomes and recent tax cuts that have put more money in people’s pockets. Annual tax refunds are also expected to give the economy a shot in the arm. Among retailers reporting monthly sales, L Brands was up 3.0% and Costco was up 5.8%. See sales reports below.

Company News



New Management Assignments: KeyPoint Partners has been awarded the property management contract for The Point, a 540,000 s/f mixed-use property in Littleton, MA - Sam Park & Co. awarded the contract....New Team Member: Patrick Busa has transitioned from the Property Management Team to the Leasing Team in the Burlington, MA office.

Accelerating News

Chick-fil-A has opened its largest location ever, on Fulton Street in Manhattan, the chain’s fourth NYC location. The 12,000 s/f restaurant, only 15 ft. wide, has 5 levels, two for food prep, and three levels of dining areas, with a rooftop terrace…ThredUp, the online consignment seller, plans to expand from its current 2 brick-and-mortar locations to 10 by yearend, and plans to eventually expand to 100 stores...Britain’s JD Sports Fashion agreed to buy Finish Line for $558 million in cash, its first entry into the US. Finish Line has 556 stores across 44 states and Puerto Rico…Pet Supplies Plus opened 5 new stores this month in 4 different states. Pet Supplies Plus opened 33 franchise stores and 12 corporate stores in 2017, exceeding 425 locations. This year, the brand is on track to open 50 new stores…Lands’ End, which operates 180 shops in Sears stores, plans to open 40 to 60 stand-alone locations over the next 5 years... Target will open 3 small-format stores in New York City in 2019, with locations in Manhattan and Staten Island, and one in 2022, in Queens. These are in addition to 2 previously announced stores due to open this summer in Manhattan…Freddy’s Frozen Custard & Steakburgers opened 17 new restaurants in the first quarter of 2018. The company also opened its 300th restaurant in Indianapolis March 13…Tractor Supply Company opened its 1,700th store in Mocksville, NC. Tractor Supply Company operates stores in 49 states and opened 101 new locations in 2017. Expansion in 2018 includes 80 new stores…The Lash Lounge has 100 locations set to open within the next year, and more than 300 in development. The Lash Lounge currently operates 19 franchise and corporate locations... Ollie’s Bargain Outlet plans to add 36 to 38 stores this year. The company currently operates 274 units…Sprouts Farmers Market plans to open 13 stores over the course of the quarter, including its first locations in Pennsylvania and Washington.  In total, Sprouts is opening 16 stores in the first half of the year. Sprouts will operate in 19 states by the end of 2018…Off-price retailer Century 21 Stores opened a 5,000 s/f concept store entitled Century 21 Edition at the Staten Island Mall in New York...Best Buy will open its first new US location in seven years, a 36,000 s/f store in lifestyle center Station Park near Salt Lake City. It is slated to open this fall... Lucky’s Market plans to nearly double its store count from 28 locations to more than 40 within the next 18 to 24 months, signing 20 leases for new stores from Montana to Florida...Giant Food Stores will construct 6 new stores, remodel 2 locations and open 5 new fuel stations in Pennsylvania over the next two years, and will enter the East Stroudsburg and Walnutport communities for the first time... Pure Hockey has acquired both Bauer Hockey “Own The Moment” stores. With the acquisition, Pure Hockey will operate 53 retail locations under the Pure Hockey and HockeyGiant brands in 18 states...CARSTAR is continuing to expand its footprint in the US and Canada with more than 30 new store openings so far in 2018

Decelerating News

Michaels Companies will shut down 94 Aaron Brothers framing and art supplies stores, and make Aaron Brothers a store-within-a-store to provide custom framing in all Michaels stores. Michaels operates about 1,300 stores in the US and Canada…Mattress Firm closed 99 stores during the fourth quarter of 2017 and will close another 175 stores in 2018. The 274 closures is higher than the 200 closures Mattress Firm announced in December 2017... Nine West Holdings Inc. has filed for Chapter 11 bankruptcy protection, with a plan to sell its namesake and Bandolino brands to Authentic Brands Group. The company plans to revamp its capital structure around its profitable businesses, including Anne Klein, Kasper Group, The Jewelry Group and One Jeanswear Group. Authentic Brands is the owner and licensor of Frye, Jones New York, Juicy Couture, Greg Norman, and Frederick’s of Hollywood...The Kroger Co. has completed the sale of its convenience store business division to EG Group for $2.15 billion. The sale includes 762 convenience stores operating across 18 states under the Turkey Hill, Loaf ‘N Jug, Kwik Shop, Tom Thumb and Quik Stop banners. Kroger’s supermarket fuel centers and its Turkey Hill Dairy were not included in the sale.

New England News

L.L. Bean opened its first urban retail store in Boston this month, an 8,600 s/f store at One Seaport...The Marshalls store at 500 Boylston Street, Boston will close in June after operating for more than 20 years, TJX Co. officials said...Bertucci’s has closed 6 of its 35 Massachusetts locations as it seeks to emerge from bankruptcy with a new owner. Across its East Coast footprint, Bertucci’s shut down 15 restaurants, leaving it with 59. The company filed for Chapter 11 bankruptcy this month. An affiliate of Right Lane Capital has agreed to acquire Bertucci’s in a deal worth up to about $20 million, though potential buyers can submit bids in the coming weeks. Bertucci’s is now owned by an affiliate of Levine Leichtman Capital Partners…Nadeau Furniture with a Soul has opened its first New England location at 750 Memorial Drive in Cambridge. Nadeau has 40 US locations.

RETAIL SALES REPORT





























Notes: figures gathered from individual company websites, press releases, and Federal filings.  Not all companies report all figures; results not reported will be marked “n/r”. Quarterly results will be updated when available; quarterly figures are shown in italics. Figures from companies not calculated to one decimal point automatically received an ending digit of 0. 

COMMERCE DEPARTMENT MONTHLY SALES

The Commerce Department says retail sales rose 0.6% last month, the largest increase since November. Auto sales jumped 2%, the most in six months. Sales rose at grocery stores, restaurants and bars, and drug stores. They fell at home and garden stores, clothing shops and sporting goods stores.

Source: U.S. Department of Commerce - commerce.gov

Mall News

Brookfield Property Partners LP has reached an agreement to buy the remaining shares of General Growth Properties that it doesn’t already own for $9.25 billion in cash plus stock. The total value of the deal was put at about $15.3 billion. Brookfield currently owns about one-third of GGP, which is the second largest mall owner in the country after Simon. With an ownership interest in approximately $90 billion in total assets and annual net operating income of more than $4 billion, the combined company will be one of the world’s largest commercial real estate enterprises. The transaction is expected to close early in the third quarter of this year...The Burlington Mall will undergo a “multimillion-dollar” renovation, owner Simon Property Group Inc. announced this month. The 1.3 million s/f mall, anchored by Macy’s, Lord & Taylor, Nordstrom and Primark, will begin work on the project this summer. The redeveloped mall, which will include new shops and restaurants, will reopen in spring 2019. Sears has closed its Burlington Mall store - the renovation will include the Sears space....Bon-Ton  is headed to liquidation. A joint venture composed of the holders of the company’s lien notes and Great American Group and Tiger Capital Group, made the winning bid at auction and will acquire the inventory and other assets of the chain. The company filed for Chapter 11 bankruptcy protection in February. Bon-Ton’s stores, e-commerce and mobile platforms under the Bon-Ton, Bergner’s, Boston Store, Carson’s, Elder-Beerman, Herberger’s and Younkers nameplates will remain open throughout the store closing sales, which have already begun.

TREASURY YIELDS

















Treasury Yield Sources:  federalreserve.gov; ustreas.gov

CONSUMER CONFIDENCE INDEX

The Conference Board Consumer Confidence Index® decreased in March, following an increase in February. The Index now stands at 127.7 (1985=100), down from 130.0 in February. The Present Situation Index decreased from 161.2 to 159.9, while the Expectations Index declined from 109.2 last month to 106.2 this month.

Source: The Conference Board - www.conference-board.org

PURCHASING MANAGERS INDEX

Manufacturing expanded in March as the PMI® registered 59.3 percent, a decrease of 1.5 percentage points from the February reading of 60.8 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business - www.ism.ws