It’s called “showrooming,” and I’ve talked to the owners of several Naperville small businesses who see it as a direct threat to their survival. In fact, it’s a national problem that may not have a solution anytime soon.
It happens when a customer uses a local small business as a showroom to examine and ask questions about a particular product that the customer then buys online to avoid the sales tax. The sales staff of the local business essentially works for a large online retailer without being paid.
One solution that, in the last few days, received the support of Rep. Bill Foster, who represents the 11th congressional district and thus most of us, is to require the larger online retailers to charge sales tax, whether or not they have a physical presence in the state.
The decision that prohibited states from forcing companies to collect sales tax unless they have a facility or employees in the state was Quill Corp. v. North Dakota (1992). The Supreme Court held that states cannot regulate or interfere with trade between the states if a company lacks the required “substantial nexus,” a term that is deliberately vague.
It is critical to understand, however, that the customer in almost all cases, as in Illinois, is still required to pay the tax as a “use” tax. The online retailer simply doesn’t collect it, thus allowing and encouraging virtually all online customers to cheat their state and local governments.
The supposed remedy is the Marketplace Fairness Act of 2013, which passed the U.S. Senate in May.
Its companion bill, HR 684, has little chance of passing the House because it’s opposed, logically enough, by Ebay and by mail order companies with paper catalogs, whose check-writing customers would need 40 pages of tables to figure out which of our 7,500 sales tax jurisdictions would apply.
Frankly, I’m not convinced there is enough lost sales tax revenue to justify heroic measures, but states could adopt a single rate for online sales, simplify their definitions of taxable goods, and establish a national clearing house to distribute revenues. There are many good things the states could do, but don’t.
And the supposed advantage of online retailers disappears when you consider shipping. When I sell my book on billmego.com I pay the shipping so the total price is exactly the same as it is at Anderson’s Bookshop, Oswald’s Pharmacy, and Restyle.
Recently, I had to order a replacement mechanism for a silly clock that makes bird noises every hour. The gearbox cost $10, but the shipping and “handling” cost an additional $17. Had I been able to buy one downtown, I probably would have paid $12.
But I couldn’t because local businesses have drastically reduced their inventories and limited them to the most popular items. I recently had to order a bread machine online because there was only one model available locally, and it had bad reviews. I couldn’t even find a tube of brass valve grease locally when I wanted to repair an old gas grill. That really discourages local shopping.
Jack Dorsey’s Square Market attacks that problem by allowing all users of the Square payment method to put their entire inventory online. Our local businesses could get together and form an online Naperville Market that would list their products and services. That would allow customers of Naperville stores to search online, discover who carried the product they were looking for, pay with either credit or cash, and pick it up at a Naperville store.
That wouldn’t solve the sales tax problem, of course, because that’s really a political problem. But it would definitely cut down on showrooming and the disgraceful abuse of our local merchants, who have put up with this nonsense long enough.