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United States Supreme Court building, Washington, D.C.

Who Loves You Baby? SCOTUS Does

July 18, 2018
One thing for sure: internet e-commerce retailers don’t love you baby, they’re out to line their own pockets.

Remember whose catch phrase that was? For you younger guys and gals, it was TV’s popular cop Theo Kojak played by Telly Savalas. He broke barriers by being one of the first Greek actors to make it big. He came on like gangbusters – just like e-commerce is now taking the internet by storm and growing by double-digits each year. One thing for sure: internet e-commerce retailers don’t love you baby, they’re out to line their own pockets and have absolutely no reservations about selling PHVAC products direct to your customers – often at, or nearly at, your cost.

SCOTUS (Supreme Court of the United States) ruled in 1992, (Quill Corporation v. North Dakota), that if you sold goods to a customer in another state, other than your own, and you had no physical presence in that state, you were exempt from collecting and remitting the sales tax to that state. Although the internet was already in existence, the first true e-commerce sale took place in 1994 in a secure transaction. Want to guess what was sold? No cheating by using the internet to find out because I’ll reveal what was sold later, so read on.

This past month, SCOTUS corrected the issue (South Dakota v. Wayfair, Inc.) they had no intention of creating because in 1992, no one could have envisioned e-commerce much less its monstrous pound of flesh it would be extracting from brick-and-mortar retailers, or the billions in lost tax revenue for states. They now ruled interstate retailers must collect and remit states sales taxes.  

Some e-commerce retailers began collecting state sales tax prior to the June 2018 SCOTUS ruling. Amazon, for example, began collecting state sales taxes in 2012, but their own third-party retailers selling via Amazon were not required to comply and account for more than 50% of Amazon sales. A shell game with all of us, our local brick-and-mortar wholesalers, and our states the collective losers. This is driving manufacturers crazy too. Check out Navien on Amazon and compare that to your pricing from a wholesaler. Navien provides policing and if they can drill down to a distributor or wholesaler who is placing their product on an e-commerce site, they pull the line from them. Navien also boldly states, right on the packaging, that online purchases void their warranty. We ran into that exact issue with a “customer” who specifically requested a quote on replacing their ancient boiler with a Navien NHB boiler who, once he obtained our quote, ran off to the internet and became a nightmare while letting me know what he could buy the products for online. You can read that story here:

A friend recently posted to Facebook that this new requirement was akin to the sky is falling and would be a severe blow to small e-commerce businesses who can’t compete with the big e-commerce retailers. Sorry, but I take the opposing viewpoint. It is patently unfair to PHVAC contractors and brick & mortar stores - especially for our suppliers who have invested heavily in showrooms. Manufacturers willingly undermine the sales process as well by allowing steep sales discounts to the online resellers. As a result, both our loyal local suppliers lose sales as do we because end-user buyers enjoy a 6% discount, on top of steep discounts by the manufacturers, by avoiding PA sales tax.

Can’t survive as an online retailer if you must collect and remit sales taxes to the states? That's called leveling the playing field. Want in the game? Play by the same rules.

I don't want my local suppliers to close their showrooms and that's where this was headed before the recent SCOTUS ruling. The alternative is we all start purchasing our goods from out-of-state suppliers, who have no footprint in your state, are faceless, and not likely to provide the level of support your local text or phone-call-away suppliers presently provide. Ours is a service business known for excellent top-notch rapid service, which I cannot provide if my suppliers aren't Johnny-on-the-spot when we need them, or the parts/products are a day or three away.

No, e-commerce retailers, in my opinion, are not wholesalers as legit wholesalers (the ones that get our business) provide price protection so we can earn a profit on material sales. Showrooms exhibit list pricing and it is then up to you to decide what final profit margin you need and not dictated by an e-commerce retailer undercutting your profit margin. Consumers frequently buy from out of state to avoid sales tax and that 6% added discount has cost us more than a few sales. I know there's more than one way to skin that cat by shifting profit mark ups to other parts of a bid, but that isn't always feasible and service work calls seldom provide any leeway. Recent sale loss was on plumbing fixtures manufactured by one of the largest manufactures in the USA - three jobs in a row. Our discount at the local wholesaler for their products is 40%. They give e-commerce retailers a 25% discount, which becomes 31% for us to compete against in PA. That 6% kicker looms large. Toss in free shipping and we’re fighting a losing battle. Material and product sales are the lifeblood of net profits for PHVAC contractors’ and wholesalers’ businesses.

The whole point of this is that the e-commerce vendors' customers are NOT paying the sales tax because the vendors without a physical location in that state can avoid the sales tax. That gives them an unfair advantage. Their out-of-state sales are not taxed in their own state either. Think that contributes to the no tax and free shipping tease they hook customers with? Let’s use a monetary example for a $100.00 widget. You get a 40% discount and know the cost is $60.00. But you pay sales tax, which in my state of PA is 6% for a cost of $63.60. Let’s add a 33% markup for a sale price of $84.59. However, your customer pays by credit card, so you take a 4% hit and net sale is $81.21. This means our true cost is $63.60 + $3.38 = $66.98.

Prior to the recent SCOTUS ruling, the e-commerce retailer’s 25% discount resulted in a sale price of $75.00. However, the buyer is not charged the 6% sales tax, which saves them $4.50, so in reality the widget cost them $70.50. Bear in mind too that the etailler may have no physical warehouse, inventory, or the same overhead as does your wholesaler. A few keyboard strokes and a manufacturer who already ships their goods to distributors might find it quite convenient to ship the goods to your customers’ doors while collecting a fatter profit from the out-of-your-state online retailer than they attain from the traditional distribution chain.

One more thing to consider and that’s the value-added warranty you are expected to provide on the products you sell. I don’t know about you, but a net profit of $3.52 isn’t going to provide you with a very good lifestyle and/or a comfortable retirement. If the widget has freight charges, how can you pass the cost along if the same widget has free shipping on the e-commerce site? If you have to match the online price, the sale now becomes a loss. We have been under constant attack over the past decade and things were not improving.

Think that sales tax thing was an issue? Amazon wants you to compete for business by becoming an Amazon-listed installer while listing your prices for installed goods – like a kitchen faucet. Unlike the big box store installing contractors who must agree to installed pricing etched in stone by the store, now Amazon PHVAC installers’ jobs will be price-driven with low bidder most likely chosen by customers already focused on price – and free shipping.    

Online retail sales are projected to be $415-billion in 2018. 67% of Millennials prefer online to offline purchases. There’s the stark reality of what has transpired over the past 26-years with the internet and e-commerce. As states sales tax revenue has fallen off due to e-commerce, you can rest assured they have raised other taxes to make up the difference.   

Can’t survive as an online retailer if you must collect and remit sales taxes to the states? That's called leveling the playing field. Want in the game? Play by the same rules and if you can't build a viable business model competing fairly, then get out of the game. Small businesses like yours and mine shoulder the greatest portion of tax burdens and government sees us as an unending source of revenue. Virtually every state is operating with deficit budgets, so a 7- to 33-billion windfall would shore up the coffers. All government has a spending problem while practically no legislators have shown the backbone to reign in spending.  Here in PA they're trying to eliminate property taxes and, get this, the holdup is they can't agree which other taxes to raise to make up the difference, so, yes, they do raise taxes to make up shortfalls in prior revenue. Our state is a live current example of that works-in-progress. We also have the fattest most bloated state legislature in the USA and they're fond of voting themselves fat pay raises in the dark of night when most of us are sleeping. When I wanted to provide input to one of our local state representatives regarding codes and enforcement, the only way I could get his ear was to hire a lawyer and only then would he grant us 20-minutes of what turned out to be wasted time and money.

Electricity usage becomes an issue due to millions of folks going online in your home state to seek out e-commerce with no sales tax and free shipping. Utility companies enjoy great benefits subsidized by the states' citizens. For subsidies related to electricity production, EIA data shows that solar energy was subsidized at $24.34 per megawatt hour and wind at $23.37 per megawatt hour for electricity generated in 2007.  By contrast, coal received 44 cents, natural gas and petroleum received 25 cents, hydroelectric power 67 cents, and nuclear power $1.59 per megawatt hour ( ).

Out-of-state "store fronts" who have been taking advantage of this sales tax loophole for their own profits are shifting the tax burden onto the citizens of those states where they ply their trade while avoiding your state’s sales tax. Businesses, like yours and mine, must pass the sales tax cost we must pay on in our sales. Smart business men and women build viable business models and run them profitably. When the State of PA passed a law years ago that we citizens must pay the state sales tax on goods purchased from out-of-state purchases (sure the average Joe will voluntarily cough up the tax dough – don’t hold your breath) and Amazon began charging PA sales tax, we searched our Amazon history and ponied up the sales tax from all prior purchases, the majority of which were not business related. Why? As a small business most likely purchasing thousands of goods annually, we’d likely be the first targets of a tax audit.

We've been in business for 131-years and never once failed to pay our taxes on time. If the online store front retailers can’t handle the burden of complying with the states sales taxes (seriously? a simple computer program can easily track that issue and there are programs already available) then fold up, move on, get a job elsewhere. No matter how you cut it, they have been enjoying an unfair advantage over businesses small to large that operate within those states who do pay sales tax and that includes the thousands of hard working PHVAC shops who are being undercut by those same online store fronts. The core issue that drove the SCOTUS decision remains: store fronts from other states without a physical presence were avoiding any sales tax, which is inherently unfair to all of us who do pay sales taxes in our respective states. With e-commerce growing by leaps and bounds, this SCOTUS ruling was long overdue.

That first secure online e-commerce transaction? It was on August 11, 1994 and used encryption to transfer the credit card information. The item was Sting’s Ten Summoner’s Tales album.

Who loves you baby? Turns out SCOTUS does.

Dave Yates material both in print and online is protected by Copyright 2017. Any reuse of this material (print or electronic) must have the express written permission of Dave Yates and CONTRACTOR magazine. Please contact via email at [email protected].

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