Retail Parasites and the Online Sales Tax

The Senate recently approved legislation that would allow states to require out-of-state businesses to collect and remit sales tax. The argument in favor of this legislation is "fairness" to brick and mortar retailers, who must collect sales tax in the states in which they are physically present.

Advocates of the Marketplace Fairness Act like to conjure the image of shadowy Internet businesses competing unfairly with the little Mom-and-Pop store on the street corner. The truth is, however, that these Internet businesses are far more likely to compete with entities such as Wal-Mart and Best Buy, all of which have their own websites but will not set their online prices so as to undercut in-store sales. These are the same large retail chains that probably drove Mom and Pop out of business a few decades ago. Best Buy and Target, two of the loudest voices in favor of the Marketplace Fairness Act, have even colluded with municipal authorities to abuse eminent domain to take Mom's and Pop's property for private gain. (The fact that the Supreme Court said this was legal does not differentiate the underlying ethics from those of a shoplifter who switches price tags in a store to pay a lower price than the seller wants, or to "buy" something that is not for sale.)

It is, in fact, worthwhile to list up front the very large retail parasites that support the Marketplace Fairness Act. Prominent among them are Amazon, Barnes & Noble., Gap, Home Depot, J.C. Penney, REI, Sears, Walmart, and eminent domain abusers Target and Best Buy. This is a strong argument for shopping elsewhere, with or without sales tax.

The issue of sales tax is largely a smokescreen and a red herring. Whatever advantage online retailers gain by not having to collect out of state sales tax is frequently offset by shipping costs. I buy most of my nutritional supplements from Puritan's Pride, even though these are non-taxable food items in Pennsylvania. The mall rent, advertising, and overhead of places like GNC and Vitamin World far outweigh the online retailer's shipping charge.
When you buy an electronic product over the Internet, you are not carrying the cost of a Best Buy mega-store, its utilities, and its personnel. This is why, with or without sales tax, the Internet is a far more efficient marketplace for most goods. This is what the loudest voices behind the "Congress, Please Help us Derail Our More Efficient Competitors Act," resent most of all. This brings us to the inconvenient truth that many, if not most, retail stores have become economic parasites that add little value for their customers.

The Changing Role of Retail

Once upon a time, genuine Mom-and-Pop retail stores were valuable supply chain partners that carried their share of the load. It was hardly practical for farmers, manufacturers, and other creators of material wealth to deliver their products directly to end users, or for end users to buy directly from the producers. Wholesalers and retailers, therefore, provided an indispensable service by centralizing a selection of goods in a single place. This was how people did business until only 120 years ago.

In 1893 or 1894, however, Richard Sears and Alvah Roebuck noticed that rural stores charged extremely high prices, perhaps because they were the only places where people could purchase everyday needs. The introduction of the Sears mail-order catalog changed that. The founders of Sears -- now one of the loudest voices against Internet shops that eliminate overhead to hold down costs and prices -- were pioneers in the circumvention of costly, and sometimes abusive, supply chains. Henry Ford said of these distribution systems in My Life and Work (1922),

If [capitalists'] money goes to complicating distribution -- to raising barriers between the producer and the consumer -- then they are evil capitalists and they will pass away when money is better adjusted to work...

Ford added in Moving Forward (1930), "There is no point in economizing in manufacturing if at the same time the suppliers and distributors charge all that the traffic will bear."

It is important to distinguish between the wholesaler or retailer that delivers a genuine service, and one that seeks to profit from "raising barriers between the producer and the consumer." The shipping cost on a can of soup, or a gallon of milk, is likely to far exceed the price of the item itself. The same applies to perishable goods that require refrigeration. Large grocery stores are, therefore, value-adding entities. Lowes, the home improvement store, carries a large selection of items that one would probably not want to pay to have delivered to one's home or work site. It also carries things, such as plumbing repair supplies, that one might not want to wait to have delivered by mail. Sam's Club, the direct successor of Henry Ford's employee warehouse store, keeps costs and prices down by buying and selling in bulk.

Now consider something with a high value to weight ratio, like a computer. I looked in at least two retail stores when I shopped for the one I have now, only to find none that met my specific requirements or price range. I finally purchased it from Dell, which allowed me to customize it the way I wanted. Not only did I not avoid sales tax (Dell charges it), I also had to pay a shipping charge. The overhead costs of the bricks-and-mortar stores, however, outweighed the latter sufficiently to make Dell the best choice.

Retail Chains Should Have Seen it Coming

CEOs with six or seven figure salaries are expected to foresee competitive threats, e.g. in a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis. The role of the Internet was easily foreseeable even during the 1990s. My book Henry Ford's Lean Vision (2002) includes a subchapter called, "Anyone want a used shopping mall?" It includes a quote from "Top 10 Reasons to Shop on the Internet-- Now!" PC Computing, December 1999, p. 206

...The sunglasses you'll pay $200 for at the boutique cost $40 on the Web ...You won't be paying a store owner's rent.

The book also cites Coleman, Calmetta Y. and Gumbel, Peter. "St. Louis Mall Declares War on E-Retailing," Wall Street Journal, 11/24/99, B1:

In an era when many retailers brandish their Internet addresses on their shopping bags, an e-commerce ban is a harsh move. But the Galleria's owner, Hycel Partners 1 LP of St. Louis, says the new policy addresses a deep concern of mall owners everywhere -- the possibility of losing rental income to online sales.

All this suggests the need for consumer education, as well as a consumer backlash against the identifiable retail chains behind this new legislation.

Designer Label Wal-Mart

Consumers also need to know about "Designer Label Wal-Mart," which involves putting fancy designer labels and made-in-America prices on Chinese-made products that one can buy (minus the designer label) in Wal-Mart, Costco, or Sam's Club. A designer label is not value, which underscores the accelerating transition of many retailers into economic parasites whose sole function is to complicate distribution, and raise barriers between the producer and the consumer. This, and not "fairness," is why they must now look to Congress to disable their Internet-only competitors with a Byzantine maze of more than 40 sales tax compliance systems. Governmental intervention is usually the last refuge of the parasite, and the Marketplace Fairness Act is just one more example.

William A. Levinson, P.E. is the author of several books on business management including content on organizational psychology, as well as manufacturing productivity and quality.

The Senate recently approved legislation that would allow states to require out-of-state businesses to collect and remit sales tax. The argument in favor of this legislation is "fairness" to brick and mortar retailers, who must collect sales tax in the states in which they are physically present.

Advocates of the Marketplace Fairness Act like to conjure the image of shadowy Internet businesses competing unfairly with the little Mom-and-Pop store on the street corner. The truth is, however, that these Internet businesses are far more likely to compete with entities such as Wal-Mart and Best Buy, all of which have their own websites but will not set their online prices so as to undercut in-store sales. These are the same large retail chains that probably drove Mom and Pop out of business a few decades ago. Best Buy and Target, two of the loudest voices in favor of the Marketplace Fairness Act, have even colluded with municipal authorities to abuse eminent domain to take Mom's and Pop's property for private gain. (The fact that the Supreme Court said this was legal does not differentiate the underlying ethics from those of a shoplifter who switches price tags in a store to pay a lower price than the seller wants, or to "buy" something that is not for sale.)

It is, in fact, worthwhile to list up front the very large retail parasites that support the Marketplace Fairness Act. Prominent among them are Amazon, Barnes & Noble., Gap, Home Depot, J.C. Penney, REI, Sears, Walmart, and eminent domain abusers Target and Best Buy. This is a strong argument for shopping elsewhere, with or without sales tax.

The issue of sales tax is largely a smokescreen and a red herring. Whatever advantage online retailers gain by not having to collect out of state sales tax is frequently offset by shipping costs. I buy most of my nutritional supplements from Puritan's Pride, even though these are non-taxable food items in Pennsylvania. The mall rent, advertising, and overhead of places like GNC and Vitamin World far outweigh the online retailer's shipping charge.
When you buy an electronic product over the Internet, you are not carrying the cost of a Best Buy mega-store, its utilities, and its personnel. This is why, with or without sales tax, the Internet is a far more efficient marketplace for most goods. This is what the loudest voices behind the "Congress, Please Help us Derail Our More Efficient Competitors Act," resent most of all. This brings us to the inconvenient truth that many, if not most, retail stores have become economic parasites that add little value for their customers.

The Changing Role of Retail

Once upon a time, genuine Mom-and-Pop retail stores were valuable supply chain partners that carried their share of the load. It was hardly practical for farmers, manufacturers, and other creators of material wealth to deliver their products directly to end users, or for end users to buy directly from the producers. Wholesalers and retailers, therefore, provided an indispensable service by centralizing a selection of goods in a single place. This was how people did business until only 120 years ago.

In 1893 or 1894, however, Richard Sears and Alvah Roebuck noticed that rural stores charged extremely high prices, perhaps because they were the only places where people could purchase everyday needs. The introduction of the Sears mail-order catalog changed that. The founders of Sears -- now one of the loudest voices against Internet shops that eliminate overhead to hold down costs and prices -- were pioneers in the circumvention of costly, and sometimes abusive, supply chains. Henry Ford said of these distribution systems in My Life and Work (1922),

If [capitalists'] money goes to complicating distribution -- to raising barriers between the producer and the consumer -- then they are evil capitalists and they will pass away when money is better adjusted to work...

Ford added in Moving Forward (1930), "There is no point in economizing in manufacturing if at the same time the suppliers and distributors charge all that the traffic will bear."

It is important to distinguish between the wholesaler or retailer that delivers a genuine service, and one that seeks to profit from "raising barriers between the producer and the consumer." The shipping cost on a can of soup, or a gallon of milk, is likely to far exceed the price of the item itself. The same applies to perishable goods that require refrigeration. Large grocery stores are, therefore, value-adding entities. Lowes, the home improvement store, carries a large selection of items that one would probably not want to pay to have delivered to one's home or work site. It also carries things, such as plumbing repair supplies, that one might not want to wait to have delivered by mail. Sam's Club, the direct successor of Henry Ford's employee warehouse store, keeps costs and prices down by buying and selling in bulk.

Now consider something with a high value to weight ratio, like a computer. I looked in at least two retail stores when I shopped for the one I have now, only to find none that met my specific requirements or price range. I finally purchased it from Dell, which allowed me to customize it the way I wanted. Not only did I not avoid sales tax (Dell charges it), I also had to pay a shipping charge. The overhead costs of the bricks-and-mortar stores, however, outweighed the latter sufficiently to make Dell the best choice.

Retail Chains Should Have Seen it Coming

CEOs with six or seven figure salaries are expected to foresee competitive threats, e.g. in a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis. The role of the Internet was easily foreseeable even during the 1990s. My book Henry Ford's Lean Vision (2002) includes a subchapter called, "Anyone want a used shopping mall?" It includes a quote from "Top 10 Reasons to Shop on the Internet-- Now!" PC Computing, December 1999, p. 206

...The sunglasses you'll pay $200 for at the boutique cost $40 on the Web ...You won't be paying a store owner's rent.

The book also cites Coleman, Calmetta Y. and Gumbel, Peter. "St. Louis Mall Declares War on E-Retailing," Wall Street Journal, 11/24/99, B1:

In an era when many retailers brandish their Internet addresses on their shopping bags, an e-commerce ban is a harsh move. But the Galleria's owner, Hycel Partners 1 LP of St. Louis, says the new policy addresses a deep concern of mall owners everywhere -- the possibility of losing rental income to online sales.

All this suggests the need for consumer education, as well as a consumer backlash against the identifiable retail chains behind this new legislation.

Designer Label Wal-Mart

Consumers also need to know about "Designer Label Wal-Mart," which involves putting fancy designer labels and made-in-America prices on Chinese-made products that one can buy (minus the designer label) in Wal-Mart, Costco, or Sam's Club. A designer label is not value, which underscores the accelerating transition of many retailers into economic parasites whose sole function is to complicate distribution, and raise barriers between the producer and the consumer. This, and not "fairness," is why they must now look to Congress to disable their Internet-only competitors with a Byzantine maze of more than 40 sales tax compliance systems. Governmental intervention is usually the last refuge of the parasite, and the Marketplace Fairness Act is just one more example.

William A. Levinson, P.E. is the author of several books on business management including content on organizational psychology, as well as manufacturing productivity and quality.