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Retail Real Estate Cheers Momentum for Online Sales Tax On Capitol Hill

While Views Remain Mixed Over How Much Difference It Will Make, CRE Almost Universally Supports Passage of Marketplace Fairness Act
April 24, 2013
Key players in retail real estate weighed in as the U.S. Senate seemed poised this week to advance the Marketplace Fairness Act of 2013, deeming the measure critical to equalizing the battle for shopping dollars between bricks-and-mortar stores and their large Internet commerce rivals.

"Why should online retailers be able to take advantage of a tax-free situation? We've always felt that online and bricks and mortar should be treated equally," Jones Lang LaSalle Retail President and CEO Greg Maloney tells CoStar. "It's something that has been misaligned from the beginning."

Another veteran of retail property investment and leasing, Gerard V. Mason, managing director of Savills, downplayed the potential significance of the federal measure. While still a victory for shopping centers and physical stores, 23 states have already enacted or are in the process of adopting legislation to tax online transactions, Mason noted.

"Frankly, I think this bill is old news. It was already in the works," Mason said. "Its passage would be symbolic, but symbolism carries weight as well. It makes everyone feel better about their future."

The measure has garnered vigorous support from CRE industry groups, especially the International Council of Shopping Centers (ICSC), which helped create the Marketplace Fairness Coalition lobbying organization.

Among the largest states that have enacted the sales tax agreements, including California and Texas, electronics giant Best Buy saw sales jump by about 10% in the first three months.

"It was a very good example of how a bricks-and-mortar-retailer was being affected by being essentially the shopping window for Amazon," Mason said.

The potential benefits of a sweeping federal tax-equalizing bill are undeniable and the current proposal seems to be fair and workable, said Rick Chichester, president and chief operating officer of Faris Lee Investments. However, both bricks-and-mortar and online and mail order sellers may need to significantly re-engineer their sales and data-gathering practices for the bill to apply equally to all.

"To be fair, brick-and-mortar stores should have to verify the address of every shopper and determine the corresponding sales tax for where each shopper lives, which is the current requirement under the proposed bill for online and mail-order retailers," Chichester said. "This is something that currently the brick-and-mortar retail industry does not do with any discipline."

Size matters for online and mail order retailers, and the complexity of determining tax rates by jurisdiction is daunting at best and probably is cost- and time-prohibitive for smaller sellers, he said.

"This might explain why eBay opposes the bill and Amazon supports it, " he noted.

With fresh support from President Obama, the Senate on Monday approved a procedural measure to allow debate to move forward on the legislation which would allow states to require large Internet retailers with $1 million or more in annual out-of-state sales to collect sales taxes.

The federal and state legislative efforts are part of a war on multiple fronts by retailers to curb the rapid advances of online sellers. Store chains and groups such as ICSC and Real Estate Roundtable have waged war against current tax laws that give Internet commerce an advantage over shopping centers and other stores.

In one highly publicized case last year, Simon Property Group Inc., the country's largest owner, developer and manager of retail real estate, filed a complaint against the state of Indiana asking courts to force the state to collect sales tax on items old by Amazon.

Garrick Brown, research director with Burlingame, CA-based Terranomics Retail Services, is hopeful that the measure will make it through the GOP-controlled House of Representatives.

As recently as last year, a chief lobbyist with NAIOP told Brown that an Internet sales tax bill would "never clear Congress" because supporters were positioning it as a new tax rather than a closed loophole.

"It's really a no-brainer to pass it," Brown said. "In any case, it's something that will have a really positive impact on bricks-and-mortar retail. Maybe not as much as retailers hope, but it will be a boost, particularly on bigger-ticket items."

Marketplace Fairness Act supporters chalked up two important wins in recent months that raised the odds of advancing the bill.

In February, the nation's largest online seller, Amazon, came out in support of the act. The Internet giant has already inked agreements to collect sales taxes in numerous states where it's building distribution and fulfillment centers - and many analysts believe, creating a capability for next-day or even same-day product delivery.

Brown believes that Amazon, which clearly viewed the tax as inevitable in striking pre-emptive deals with the states, is now focused on building such a platform, which he said could rapidly erode market share for bricks-and-mortar retailers.

In a letter, an Amazon executive thanked senators for introducing legislation that "will allow states with simplified rules to require sales tax collection by out-of-state sellers who choose to make sales to in-state buyers."

Just as importantly, President Obama endorsed the measure last weekend, giving momentum to the Senate vote Monday to avoid filibuster and begin debate.

However, the bill must still clear Congress and be signed into law by the president. Opposition consists mainly of anti-tax conservatives, small business groups and eBay, the online site where many of those smaller merchants do business.

The Marketplace Fairness law includes a safeguard that exempts companies with less than $1 million in interstate revenue, but there are already rumblings of a House resolution opposing the act.

"Any representative that opposes the Marketplace Fairness Act, which only closes a sales tax loophole that hurts the vast majority of the retail sector, has no right to claim that they are pro-business, pro-jobs or even pro-fiscal responsibility," said Brown, calling the opposition "utter stupidity."

"This is one of the few things that both sides of the aisle should have been able to rally around in these contentious times."

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