Municipal League Seeks Special Session to Collect Online Sales Tax

by Mark Friedman  on Monday, Jul. 17, 2017 12:00 am   5 min read

Some malls have been decimated by increasing retail sales online, but Park Plaza in Little Rock boasts more than a 90 percent occupancy rate, with an H&M store scheduled to move in by the end of the year. (Sarah Bingham)

It may be futile, but several Arkansas cities are urging Gov. Asa Hutchinson to hold a special session to pass legislation to force out-of-state online retailers to start collecting sales taxes.

Cities that have seen local sales tax collections remain flat or even decline in recent years (see PDF chart) have begun to feel the beneficial effect of Amazon.com’s decision to voluntarily collect sales taxes, which started in March, said Don Zimmerman, executive director of the Arkansas Municipal League.

But Amazon is just one online retailer, albeit the largest, and it isn’t even collecting the tax from third-party vendors who sell through Amazon’s site.

“There’s a lot of discussion about how much revenue the state and county and the cities lose when people purchase over the internet,” Zimmerman said. “But the poor business owner ... loses the whole transaction. … So those are the guys that are really suffering.”

In the 91st General Assembly earlier this year, a bill was introduced in the Senate that would have required out-of-state online retailers to collect sales taxes and remit them to the state. It didn’t pass.

Zimmerman said his organization is lobbying cities to pass resolutions pushing the governor and legislators toward a special session, where legislation could be crafted requiring online retailers to collect sales tax. Retailers with physical stores in the state are required to collect sales tax on merchandise sold online, as Wal-Mart Stores Inc. of Bentonville does.

Several cities have resolved to encourage a special session, including Jacksonville, Sheridan, Piggott, Lake View and Marianna, Zimmerman said. “I don’t think one’s failed yet,” he said. Businesses also support the move, he said.

Despite the push, Hutchinson told Arkansas Business last week that no special session is planned. “I am receiving numerous resolutions from cities on this issue, but I do not believe there is a consensus yet,” he said in an email. “I also know that tax fairness is something that will be considered by the Tax Reform Task Force of the legislature, and I look forward to its recommendations.”

‘Closings Have Accelerated’
Cities that rely on the taxes from shopping centers or department stores could receive more bad news as some retailers see their sales continue to fall.

Credit Suisse recently projected that 20-25 percent of the malls across the country will close in the next five years as an increasing number of customers turn to shopping online. “Store closings have accelerated,” the report said.

J.C. Penney Co. of Plano, Texas, announced earlier this year it is closing nearly 140 stores nationwide, including locations at Benton and Blytheville. Those Arkansas stores will close at the end of the month.

Not all malls and retailers say they are having trouble, however. Park Plaza in Little Rock reports an occupancy rate of more than 90 percent. The apparel retailer H&M announced earlier this year that it was coming to the Outlets of Little Rock and Park Plaza. Both locations are expected to be open toward the end of 2017.

Still, the trend is undeniable. Many stores are no longer profitable, Suzanne Mulvee, director of research and senior real estate strategist at CoStar Group Inc., said in an April report. CoStar provides commercial real estate information and is headquartered in Washington.

“In general, the market has an oversupply of storefronts, real median household incomes are down, and the internet is siphoning off spending once meant for traditional stores,” she said. “As a result, more stores will close.”

If a mall declines, taxes are one of the losses that a city feels as a result, Bruce Clark, an associate professor and marketing group coordinator at D’Amore-McKim School of Business at Northeastern University, said in an email response to questions from Arkansas Business.

“Cities can attempt to counter this by attracting more stores, marketing their location, or changing the operating conditions for existing stores,” he said. “Failing that, looking at other tax generating use of the space such as manufacturing, wholesaling or office space can be an alternative.”

North Little Rock Mayor Joe Smith said he expects the number of department stores to shrink. “I’m anticipating that this is going to be the future,” he said.

But he said he is more worried about e-commerce than he is about department stores closing. North Little Rock’s local sales tax collections dropped 1 percent to $17.5 million between 2015 and 2016, and Smith said one of the reasons is the failure to capture taxes on internet sales. He estimates that leaving the tax uncollected is costing the city of North Little Rock between $750,000 and $1 million annually.

And e-commerce is still growing. Online sales account for 8.2 percent of all retail in the U.S., according to eMarketer, a market research firm based in New York. By 2020, eMarketer projects, 12.6 percent of total sales in the U.S. will be completed online.

Lance Ivy, senior general manager at Park Plaza, said online sales are still a small percentage of total sales. He said that people are always going to need the shopping experience.

“Retailers want the best of both worlds,” Ivy said. “They obviously want the online sales, but they also want that channel where … customers can experience all their new things as well.”

Local Tax Base Suffering
Little Rock Mayor Mark Stodola said the failure to collect internet sales tax is eviscerating the local tax base and hurting brick-and-mortar stores.

Arkansas consumers who buy items tax-free online are supposed to submit the tax to the Arkansas Department of Finance & Administration. But almost no one does.

“The fact that people are not paying a legally obligated use tax is going to cripple our cities and towns sooner or later if Congress doesn’t do something about it,” Stodola said.

In Washington, federal legislation to force online retailers to collect sales tax has stalled.

Fort Smith Mayor Sandy Sanders said he thinks the legislation to collect sales tax online didn’t pass in the last session because too many people thought it was a new tax. “And it is not,” Sanders said. “It is an existing tax that people … avoid paying.”

About three years ago, the city of Fort Smith estimated it was losing $500,000 annually on online sales that aren’t taxed, Sanders said. “If you extrapolate that into lost sales to local shops, … that’s a significant hit for our community,” he said.

Zimmerman, of the Municipal League, said the total revenue cities receive from the sales tax has been flat the first few months of the year compared with the same period a year ago.

In May, however, the numbers started to climb, Zimmerman said. The money the cities and counties received in May is from purchases made in March, when Amazon started collecting the tax. The cities received $55 million in May, compared with $51 million in May 2016.

And in June, collections were about $51 million compared with $48 million the previous June, he said.

Zimmerman attributed the jump to Amazon’s sales tax collections. (DF&A doesn’t release tax collections for an individual retailer.)

Nevertheless, Stodola said, Amazon’s third-party vendors aren’t collecting the sales tax.

“So it’s not a panacea or a solution,” he said.

Brick-and-mortar retailers also would like to see online retailers collect the sales tax, he said.

“The reality is you’re going to wind up with some empty buildings,” Stodola said. “That breeds all sorts of problems, dilapidated and boarded-up buildings. So it’s got a lot of ramifications above and beyond just the loss of revenue.”

 

 

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