In June, the Supreme Court ruled that states can begin to collect sales tax on web purchases.
Previously, online sellers who did not have a physical presence (or “nexus”) in a given state had a perceived advantage over sellers that did. This is because these online retailers did not have to collect and remit sales tax back to the state in which the buyer lived. Rather, it was the buyer who was supposed to, at the end of the year, take all the purchases he or she made online that were not collected, calculate the sales tax, tally up the total and remit it to the state at tax time.
If we’re all being honest with ourselves, we know that it’s no stretch to say that this method for collecting sales tax for online purchases was costing states up to $33.9 billion annually in payments that were simply never made. Now that states have been given control to collect sales tax on web purchases, how will this impact our retailers?
Moreover, how will this impact the use of and need for commercial retail space?
For insights we went straight to the source. Omni Realty Group interviewed Central Pennsylvania retailer and owner of World Cup Ski & Cycle in Camp Hill, Lee Gonder.
Lee is a wealth of knowledge when it comes to running a successful a local retail store and competing against online retailers. Through the questions and answers below, you will gain a better understanding of challenges brick-and-mortar retailers are up against and how the smart ones are developing strategies to provide unique benefits to customers that online retailers simply cannot replicate.
Q&A with Lee Gonder
Omni Realty: As a local, brick-and-mortar retailer, how have you been impacted by online retailers?
Gonder: It’s difficult to quantify the impact of online retailers in dollars, but it’s easy to see their effects in day to day business. With online retailing, the consumer no longer has to compromise on their purchase; they will go find exactly what they want. As a small, local retailer it’s impossible to stock, service or even know about every conceivable product within your industry.
In the past, you could explain the choices you made in your inventory and why they were best suited for the local consumer. Most of those educational opportunities are gone with the internet. All research is done online and the retailer is no longer the expert. With the availability of virtually any product online, not only can the consumer research their purchase, but more than likely have a direct link to be able to make the purchase. We’ve been affected on both big ticket items like bikes and skis, but we also take an incremental hit on everything from ski wax to bike chains and other accessories.
Omni: If you had to pick one thing, what would you say is your biggest competition right now?
Gonder: Online retailing would have to be our biggest competition right now. In the ski industry, there are a number of domestic companies that do a good job of providing consumers with numerous options for purchase. The ski industry does a reasonable job of requiring its dealers to maintain minimum advertised pricing (MAP). With the current MAP policies it allows my business to compete on price, just bringing inventory choice in as the major obstacle to making a sale.
However, in the bike industry it is quite different. There are numerous international companies that really make competing for the consumer very difficult. The international companies are not governed by the MAP policies that we U.S. retailers are asked to abide by. Therefore, not only can we not compete in the inventory game, but quite often they have pricing that is equal to or sometimes less than my wholesale. Add in two-day free shipping, and there go a lot of my incremental parts and accessory sales.
Omni: Given the recent supreme court ruling to allow states to tax online purchases, do you think this will drive more business back to local brick-and-mortar retailers?
Gonder: Simply put, no. Many of the larger online retail services, like Amazon, already have nexus in the state of Pennsylvania. They already had to collect and remit sales tax. It may help curb the purchasing of some bigger ticket items, but I think the effect will be minimal.
Speaking as a retailer, it will make me rethink how I handle my webpage, which is ecommerce enabled. Now I will have to collect and remit tax to other states if I sell something on my site to an out-of-state consumer. That becomes another hurdle for a small business, to track and remit sales tax to out of state government agencies. I think for a small, local business it may indeed just make things a bit more difficult. The larger companies that have the infrastructure to handle these changes will be able to continue with their online retailing with a few internal adjustments.
Omni: How have you had to adjust your business strategy to compete with online shopping?
Gonder: Our focus over the past several years has been to invest in technology or services that can’t be bought on the internet. Precision ski tuning equipment, bike fitting equipment and ski boot fitting equipment and knowledge. Some services can’t be easily addressed online, so we’ve made investments in those areas. We’ve trained the staff to sell that service, use the equipment and that is what sets us apart from the online retailer.
Competing against online retailers is no easy task for our local, brick-and-mortar stores. Though the Supreme Court ruling to allow states to collect sales tax on web purchases was intended to level the playing field for retailers, it’s not exactly an immediate windfall for local retailers.
However, commercial real estate professionals could see a boost in demand for commercial retail space as both conventional and online retailers may put more stock in brick-and-mortar locations since there is no longer an advantage to not having a physical location in each state. In fact, being closer and more accessible to customers will become an even greater advantage for retailers.
For this reason, commercial real estate remains a critical aspect of any retailer’s business strategy. Location, visibility and flow of space has a profound impact on how customers find you and their customer service experience. Retailers who wish to remain competitive against online retailers, or even other brick-and-mortar retailers, should closely consider whether their commercial space is meeting the needs of the business and their customer base.
Through the insights shared in this article, it’s obvious that local retail businesses will continue to face some unique challenges, even after the Supreme Court ruling on online sales tax. Being strategic with the location and type of commercial retail space a business invests in can help deliver exceptional customer service, and in turn earn more business.
Mike Kushner is the owner of Lower Paxton Township-based Omni Realty Group.