By Beecher Tuttle
The only thing Luke Cutchen loves more than playing guitars is selling them. As the manager of Texas-based Musicmakers Austin for over a decade, he's often seen customers browse without buying. But over the last few years, the practice has become more routine, and more peculiar.
Customers will walk in, ask questions, find the guitar they want, then head back home to buy the exact same model online, all to avoid paying sales tax. It's called showrooming, and brick-and-mortar retailers believe it's killing their business and inflating the unemployment rate.
Mr. Cutchen and other small business owners believe the explosion in e-commerce is due in part to what many perceive as a loophole in the tax law, which allows online retailers that don't have a distribution center in a particular state to refrain from charging sales tax on Internet purchases. If you live in New York City, buying online can save you 8.875% on equally priced products if the company doesn't have a presence in the state.
Without a sales tax advantage, online retailers like Amazon.com Inc. (AMZN) could find themselves on the wrong side of the pricing war. A study conducted by Telsey Advisory Group, a consulting firm, in July 2011 showed that for 42 like-for-like products Wal-Mart Stores Inc.'s prices in Connecticut were 0.3% lower than Amazon's. But at the checkout counter, Wal-Mart has to charge sales tax, which added 6% to its prices when the survey was conducted.
To even the playing field -- and add jobs -- governors in some states such as Texas and New Jersey have reached deals with Amazon requiring the online retailing giant to collect sales tax. In return, Amazon gets state tax breaks and help finding locations for new distribution centers that will enable it to offer same-day delivery to more customers. The distribution center in Texas is expected to create around 1,000 new jobs; Amazon claims its fulfillment center employees earn 30% more than the average physical retail store employee.
Amazon began collecting sales tax in Texas on July 1 and, even though other online retailers haven't followed suit, Mr. Cutchen said he has seen about a 10% uptick in sales of small-ticket items that customers used to buy on Amazon. The music store hired an additional employee in July to help handle the increase in customers walking through the door, Mr. Cutchen said. Musicmakers Austin had been forced to make job cuts in previous years.
With momentum gaining on the local level, several federal lawmakers are sponsoring a bill that would give states the option of collecting sales tax from out-of-state online businesses. Amazon has said it will support the move, but other online sellers aren't so sure. Federal legislation, said Sen. Dick Durbin (D., Ill.), who is a bill co-sponsor, is "critical to the bottom line of local businesses" and will result in significant job expansion in the retail industry.
"The sales tax loophole is the main reason people shop for diamonds on the Internet," said Abraham Janet, owner of New York City-based L&L Jewelry. Just last week, a customer told him he planned to buy his diamond online to avoid New York City's sales tax, Mr. Janet said. Customers save, on average, about $600 buying diamonds online instead of at L&L Jewelry, he said, and he hasn't hired staff to serve customers because of showrooming.
David Kruger, owner of Kruger's Diamond Jewelers in Austin, Texas, believes that customers are actually overspending online due to the desire to eliminate paying sales tax. "Online jewelers will provide a 5% increase in quality that costs you a 20% premium in price," Mr. Kruger contends.
Whatever the real or imagined savings for consumers, "the perceived price advantage online puts brick-and-mortar retailers at a significant competitive disadvantage," said Jason Brewer, vice president of communications and advocacy at the Retail Industry Leaders Association, which represents chains like Best Buy and Lowe's, which declined requests for comment.
"Existing sales tax laws create an unfair pricing advantage that benefits online-only retailers," said Target Corp. (TGT) in an emailed statement to FINS, noting that it welcomed competition. "All retailers must play by the same rules."
In a 2010 study of California's retail industry done for TaxpayersAdvocate.org, Rea & Parker Research found that 18,300 jobs were lost to out-of-state online sales that year, and estimated that number will grow to 34,100 by 2015 and 63,400 by 2020. Researchers at Rutgers Edward J. Bloustein School of Planning and Public Policy reported in May of last year that the collection of sales tax from online retailers would result in the creation of up to 1,440 retail jobs.
Studies in Texas and Pennsylvania found similar results, estimating direct and indirect job gains of 13,362 and 4,285, respectively.
Limit Job Losses
David French, head lobbyist at the National Retail Federation based in Washington, said he believes that federal intervention would do more to limit job losses than create new retail jobs. Fixing the sales tax "anomaly" is not a magic elixir for brick-and-mortar retailers, who need to bolster their own e-commerce offerings to remain competitive, he said.
Online retailers believe they are already playing by the same rules because "any company that has a physical presence in a state collects sales tax," said Steve DelBianco, executive director at NetChoice, a coalition of trade associations, e-commerce businesses and online consumers. "If a local store ships to a customer in another state, are they collecting sales tax?" Often, they aren't.
A bill promoting online sales taxes may pass as early as this year as more Republicans offer their support, Mr. Durbin said.
"The word tax scares away a lot of politicians," he said, "but as more governors favor the legislation, members of Congress will eventually support it."
Write to Beecher Tuttle at Beecher.Tuttle@dowjones.com
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