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Worthington retailers jump into internet sales tax debate

Zuby Jansen is pictured in her business, Crafty Corner Quilt & Sewing Shoppe in Worthington. (Karl Evers-Hillstrom / The Globe)

WORTHINGTON — Retailers in the Worthington area, much like those around the country, are fighting a losing battle against online sellers, especially the ever-expanding behemoth Amazon.

While more than 7,000 retail stores closed nationwide in 2017, a single-year record, Amazon’s net sales grew by 38 percent, generating $177.9 billion in revenue.

Rules regarding taxation of online sales has drawn the ire of Worthington brick-and-mortar retailers. The focus comes as the U.S. Supreme Court is hearing South Dakota v. Wayfair Inc., a case that could define the landscape of sales tax on internet sellers.

Quill Corp. v. North Dakota set a precedent in 1992 in which sales tax can only be enforced on businesses that have a physical location in a state. When South Dakota passed a law requiring large online-only retailers to charge sales tax on in-state purchases, Wayfair, and Newegg refused, citing the Quill precedent. That lead to a lawsuit from the state, which made its way all the way to the Supreme Court.

In Minnesota, large retailers such as Walmart, Target, Best Buy and Apple, which all have physical locations in the state, charge state and local sales taxes to items shipped to Minnesota residents. Amazon began charging state and local sales taxes in 2014 prior to opening a new warehouse in Shakopee.

However, Amazon only charges sales tax on items it sells directly. Third-party vendors, which now make up more than half of the website’s sales, are generally not required to charge sales tax.

In 2017, Minnesota became the the first state to pass a bill requiring companies that operate marketplaces and have any sort of presence within the state to charge sales tax. Vendors such as Amazon, eBay and Etsy must collect sales taxes on behalf of their third-party vendors starting July 1, 2019.

If Quill is overturned, however, Minnesota would likely be able to enforce sales tax on all online sellers, including online-only retailers — and much sooner than 2019.

‘Under fire’

According to several Worthington businesses, some shoppers go into their stores to check out an item, but don’t always commit to buying anything, partly because they might be able to find it cheaper online. As online sales have expanded, the “showrooming” phenomenon has spread to all kinds of businesses, even those that sell large items such as furniture and appliances.

“It happens all the time,” said Brent Riemersma, sales professional at Karl’s. “They do it right here on their phones while we’re standing here watching them. They’ll show us where they can get it for less online.”

Ken and Zuby Jansen, owners of Crafty Corner Quilt & Sewing Shoppe, have seen it firsthand. Ken said one customer bought an item, walked into their car, found it cheaper online on their phone, then returned it.

“Just a few minutes later, they walked back in and told me they found it for $5 less online,” Ken said.

“If they decide to go on Amazon and buy it, pretty soon that brick-and-mortar store isn’t going to be here anymore and they won’t have a source to look at it and check it out,” Zuby said.

Ken acknowledged most customers don’t do that. But the point still stands that items can be found cheaper online, and sales tax makes the difference greater, he said.

Retailers noted the impact of sales tax becomes more apparent as the item gets more expensive — such as a large appliance or furniture— especially when Worthington’s .5 percent local sales tax is added into the equation. Worthington's local sales tax collects on sales under $4,000. The tax does not apply to motorized vehicles. Instead, a $20 excise tax is charged. 

Darlene Macklin, executive director of the Worthington Area Chamber of Commerce, said small brick-and-mortar businesses are especially hurt by online sales and the sales tax discrepancy.

“What’s going to be left of our brick-and-mortar stores if things keep going the way they’ve been going?” Macklin said.

Worthington Mayor Mike Kuhle said main street retailers are struggling to keep up with online retailers as it is — and although they may never be able to keep up with them, the system needs to be fair.

“Our retail is under fire because of internet sales,” Kuhle said. “We’re never going to be able to completely level the playing field, but these companies need to charge the sales tax.”

‘There’s an app for that’

The Government Accountability Office found that the state of Minnesota would gain anywhere from $132 million to $206 million if tax collection on remote sales were enforced. A study from the American Booksellers Association estimated $65 million to $84 million in sales tax was left uncollected from third-party Amazon sales in 2016.

Worthington collected a all-time high $1.5 million in local sales tax revenue in 2017, up from $905,617 the year prior. But city officials wonder just how much more they could have collected from certain online sales.

Supreme Court Justice Samuel Alito, speaking during oral arguments last week, reprimanded that attitude, and said states and municipalities “have a strong incentive to grab everything they possibly can.”

Kuhle has a different perspective.

“That Supreme Court justice doesn’t have to worry about keeping up our local streets, providing for our local law enforcement and our fire protection …  they don’t think about that,” Kuhle said.

Opponents of online sales taxes say there are more than 12,000 state and local jurisdictions that need to be calculated, making it impossible for small online sellers to keep up.

"The reality is that these small businesses are just going to go out of business, because they can't absorb the costs," said Andrew Pincus, who represents eBay and its sellers.

National Retail Federation President and CEO Matthew Shay said the argument is no longer valid, as businesses are already calculating it right now.

“That might have been the case in 1992, but technology has eliminated that concern just as it has transformed the retail business and so much of the rest of our world,” Shay said. “Today, there’s an app for that.”

Kuhle noted Amazon is able to identify taxes based on the address to which it’s sending the item. It automatically identifies whether or not the address is within city limits when determining local sales tax.

“If one company can do it, all companies can do it,” Kuhle said. “With the software and computer systems now, anybody selling any internet sales into Worthington should be able to track and remit back our local sales tax.”

‘Support our local businesses’

Brick-and-mortar retailers know they will never quite be able to match Amazon’s pricing and selection, even if the sales tax playing field is leveled. But retailers also know they have their own advantages.

“Service,” Ken said. “You can't get your sewing machine or vacuum cleaner repaired online. That's going to be one of the factors that keeps small businesses afloat.”

The human element is always important, Zuby said. Crafty Corner offers free classes to anyone that buys a sewing machine — a better learning experience than YouTube can provide.

Purchasing an expensive item in Worthington will cost more due to sales tax. But Wayne Rohrbauck, Karl’s store manager, said buying local means having peace of mind — and having reliable, fast service.

“Is it worth saving a little bit on tax knowing you won’t get any service in the next year?” Rohrbauck said. “If you buy a fridge online, have it delivered and something breaks, good luck.”

Macklin encouraged shopping at local brick-and-mortar businesses, as they are major job creators and the lifeblood of the local economy.

“We need to support our local businesses,” Macklin said. “If we shop local, our stores will stick around.”

The Supreme Court is expected to rule on South Dakota v. Wayfair Inc. in June. 

The article was updated on Wednesday afternoon to clarify details about Worthington's local sales tax.