As the Marketplace Fairness Act, otherwise known as the online sales tax, moves to the House, brick-and-mortar retailers should understand how it could affect their operations if it passes.
The new kid on the retail block is here to stay. As consumers’ shopping habits shift toward mobile and web purchases, traditional brick-and-mortar retailers continuously feel e-commerce’s tightening grip on consumer pocketbooks, and pet stores are no exception.
The pet industry has seen an uptick in online competition over the last few years as retailers like PetMed Express, Foster and Smith, and Wag.com gain market share. Online sales of pet food and supplies reached $2 billion in 2011, and are expected to rise to $2.5 billion by 2016, according to a December 2011 report from IBIS World, a Santa Monica, Calif.-based market research firm. PetMed Express and Foster and Smith were top earners online, earning an estimated $168.9 million and $162 million in sales in 2011, respectively.
With little overhead and smaller staffs, online retailers can offer pet owners lower prices. And, under a precedence set by a Supreme Court ruling in 1992, Internet sellers are exempt from collecting state sales tax; except in states where the business has a physical presence.
“The Internet is a terrific marketplace for comparing prices,” says Joe Dowley, a partner who monitors tax law for clients at international firm McKenna Long & Aldridge, based in Washington, D.C. “If you add that on top of the fact that you don’t have to pay the sales tax, then you’re really cooking.”
These online advantages make competition stiff for Main Street, which is why many traditional retailers are hoping new legislation will help level the playing field. In May, the U.S. Senate passed the Marketplace Fairness Act (MFA), a bill that would require states to collect sales tax from online retailers at the time of the transaction—no matter where the business is located. Only online businesses with less than $1 million in annual sales would be exempt from the law.
For pet specialty retailers with stores in states that have a high sales tax, passage of the MFA could offer a break from online competitors. Teresa Miller, owner of Treats Unleashed, a St. Louis-based pet retail store with seven locations, says the nearly 10-percent sales tax her customers pay in some locations makes it harder for her to compete with online retailers. “At 10 percent [sales tax], it’s almost a premium if you’re buying local, and it becomes a complete disadvantage when you’re trying to compete online,” she says.
Miller—who lobbied for passage of the bill in Washington, D.C., in April—says the Marketplace Fairness Act is important because it sets a standard and provides consistency across all states. “If passed, it will level the playing field with some of those gigantic online companies, who right now are strategically putting themselves [in locations] where they don’t have to pay the sales tax,” she adds.
Other provisions of the bill could help brick-and-mortar pet retailers, like Miller, looking to add or grow an online store of their own. Under the MFA, states would be required to simplify their sales tax laws in an effort to make multi-state collection easier, or can join the Streamlined Sales and Use Tax Agreement (SSUTA)—a governing board that harmonizes the administration and collection of sales and use taxes among member states, of which 24 are currently members.
“The Streamlined Sales Tax and Use agreement would make [this collection] easier for online sellers. It makes it easier for states to calculate who gets what in a transaction, and it makes it easier for retailers to purchase a software, which gives them the opportunity to determine how to assess the tax in a particular state or jurisdiction,” Dowley says.
That simplification, says Miller, will help her develop a business plan for growth of Treats Unleashed’s online store. While her online sales are still under $1 million, the MFA’s requirements of states to simplify their tax laws or join SSUTA, would help Miller move forward with her plans to grow the online store.
“If it doesn’t get passed, I’m scared the states will develop their own enforcement policies, and I’m going to have to keep track of 50 different states with 50 different polices,” Miller says. “[The Marketplace Fairness Act] would give us a consistent way to put this in place, with a standard software and practice so retailers can collect [the taxes] without 50 different rules.”
While the MFA awaits its vote in the House of Representatives, Dowley says the bill is inevitable. “The [Supreme Court] left it open for Congress to change the law, and it has been brewing for several years, particularly since the Internet has grown by leaps and bounds,” he says.
Still, Miller recognizes that customers will continue to make purchases online. “It’s not really about brick-and-mortar versus the Internet sellers,” she says. “It’s about fairness or at least a consistency across both mediums.”
Another Piece to the Puzzle
While passage of the Marketplace Fairness Act (MFA) could offer brick-and-mortar pet specialty retailers more equality with their online competitors, online sales will continue to grow at double-digit rates over the next 10 years—and in order to stay competitive, traditional retailers will need to offer pet owners what online retailers simply cannot.
“Retailers should not be looking at the Marketplace Fairness Act as any kind of relief from Internet competition,” says Crosby Renwick, executive director of strategy at CBX, a New York City-based brand agency and retail design consultancy. “It will level the field on sales tax, but that’s a small piece of the puzzle.”
In order to break through the barrier and ease the competition, asserts Renwick, Main Street retailers need to reinvent what their purpose is on the retail landscape. Services like grooming and daycare are benefits online retailers cannot offer, however many retailers may not realize that the greatest asset they have over their competitors is their physical space.
“Retailers can use their physical space to their advantage to make their store a social meeting place,” Renwick says. Bringing pet owners together through events—for example, hosting an event that exclusively gathers Boston Terrier lovers—gives customers a reason to make an extra trip to the local pet store. And while customers are basking in Boston Terrier glory, they will browse and most likely make a purchase, Renwick says.
“Retailers have their ace in the hole being a physical place where people of like minds can get together,” he says. “What they have to sell is a social connection and a relationship. The goods will surround that, and it will engender the sales of those goods.”