Will An Internet Sales Tax Save Shopping Malls?

You can think of it as the “shopping mall protection act”  or maybe just a hint of marketplace fairness, legislation recently passed by the US Senate would require online retailers with revenues of more than $1 million to collect and pay sales taxes.

This is something very new in the history of the Internet, a recognition that the Internet marketplace is now real and no longer requires a sales tax advantage.

The subject of an Internet tax is fairly complex: Who pays the tax, the seller or the recipient? Must the seller be located in a given state, just the buyer or both?

In 1992, the Supreme Court decided in Quill Corp. v. North Dakota that the state could not collect a sales tax because Quill had no physical presence in the state. This was a great decision for mailers and cataloguers and in general but did not immediately mean much to Internet merchants because they had virtually no marketplace presence at the time.

Minimal Online Tax

The result of the Quill decision is that online retailers had the opportunity to grow with few worries about state taxes. The general rule was that as an Internet retailer you paid taxes in the state where you were physically located and if you were located somewhere overseas you likely paid nothing.

At first the tax-exempt status of online sales was not a big problem. Yes, state and local tax revenues were being lost but the numbers were tiny and a new business was being created. Over time, however, online shopping became more accepted meaning there was less growth for bricks-and-mortar outlets and smaller tax collections for the states.

A number of recent top chain retailers are now gone and more will inevitably join them. As the chains become smaller or disappear the demand for mall space and strip center locations will fall, not good news for commercial real estate holders. In my area, as an example, Circuit City locations have closed.

The problem with retail outlets is that everything they carry can be found online. Why buy locally when you can purchase online, often with no sales tax or delivery charges?

Forbes describes the situation as the “Coming Death of the American Shopping Mall.”

“I don’t think we’re overbuilt, I think we’re under-demolished,” Daniel Hurwitz, president and CEO of DDR Corp., told the CoStar Group.

“Online retailers are relentlessly gaining share in many retail categories, and offline players are fighting for progressively smaller pieces of the retail pie< says Jeff Jordan, writing in The Atlantic Monthly. “A number of physical retailers have already succumbed to online competition including Circuit City, Borders, CompUSA, Tower Records and Blockbuster, and many others are showing signs of serious economic distress. These mall and shopping center stalwarts are closing stores by the thousands, and there are few large physical chains opening stores to take their place. Yet the quantity of commercial real estate targeting retail continues to grow, albeit slowly. Rapidly declining demand for real estate amid growing supply is a recipe for financial disaster.”

Now, by a vote of 69-27 the Senate has passed the Marketplace Fairness Act. The legislation is supported by bricks-and-mortar shopping outlets, no surprise there. However, it is also supported by large online retailers, companies that can easily afford the logistical headaches of tax collections from thousands of governmental agencies.

Will the proposed legislation pass the House and agin support from the President? This is to be seen. But what seems obvious is that in some way universal online sales taxes are going to shop up on most larger sites, and probably sooner rather than later.

The next step after passage of a universal online tax will be to have a central pool which will collect online taxes from all Internet retailers with revenues above $1 million and then make distributions to the states, perhaps on a per-capita basis. Such a pool will solve the complexity, collection and distribution problem with a single online address.

As to shopping malls themselves, look for well-located centers to become, er, well-located residences with up-scale shopping and restaurants nearby, and plenty of parking.

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