Hot Topics / Insights / Multichannel

US Successfully Introduces Online Sales Tax, So What About Our GST?

Texas introduces online sales tax collection

As US states begin to fall like dominos, introducing methods for collection tax from pureplay online retailers, there are easy parallels to draw with the Australian retail predicament. But just how similar are the two scenarios?

Starting on July 1st, online retailers in Texas are now required to collect sales taxes under recently introduced legislation aimed at ‘evening the playing field’. Texas is now the eighth US state to follow this path.

For Americans, the problem is clear; old laws developed for an old retail paradigm allow online retailers to avoid collecting or paying taxes on sales for states in which they have no physical presence. For retailers with bricks-and-mortar stores, supporting large overheads and struggling under the burden of significant risk, this added competition makes their position untenable.

“A true free market is devoid of government preferences and special treatment,” said Sandy Kennedy, President of the Retail Industry Leaders Association. “Texas has made a powerful statement that its time to end special treatment for online retailers and close the sales-tax loophole that gives companies like Amazon an artificial leg up on Main Street retailers,” she said, according to Chain Store Age.

The real motivation in the US for collecting sales tax is really the sheer amount of business that Amazon is able to poach from bricks-and-mortar businesses. While many other pureplay operations exist, they all pale into insignificance by comparison. By introducing legislation to make the collection of sales tax mandatory, Americans have effectively placed a muzzle on their rabid online giant – even if it is to the detriment of the much smaller online retailers.

Meanwhile, closer to home the GST threshold debate continues to rage on unabated, with members of the NRA just last week petitioning the government for new legislation to be introduced to address the issue. Their argument is roughly the same as the Americans’ – allowing overseas retailers (that are already at a competitive advantage) to have further concessions by way of not paying taxes on items under $1000 creates a significantly uneven playing field. This situation simply doesn’t support those retailers that are already struggling under the weight of depressed consumer spending.

I may as well come out and say it – I happen to agree.

Online retailers do have a competitive advantage over their traditional counterparts – overseas retailers even more so. The GST threshold only exacerbates these concerns, widening the difference in margins and affecting traditional retailers’ abilities to price their stock competitively.

That being said, it is ostensibly an oversimplification (or perhaps, a downright fairytale) to believe that introducing legislation to adjust the Low Value Threshold  (LVT) will solve the issue in Australia as the Americans believe collecting online sales tax has solved their retail problems.

The issue is more complex than that. Firstly, consider the fact that the amount of trade going offshore is nowhere near as high as some retail organisations would have us believe. The MasterCard World Survey on Online Shopping Behaviour, released earlier this year, reveals that 75 percent of online sales made by consumers over 50 years old remain local. This number decreases for younger consumers, with 18-24 year olds spending online locally just 58 percent of the time. However, the preference is still for local online retailers.

Combine those figures with the overall slice of retail pie that the internet has inherited. NAB‘s online retail index currently has that number set at just 5.2 percent. If we can assume that the clear majority of online sales revenue actually stays within Australia, then the overall amount of sales that the NRA and other traditionally-minded retail bodies want the Federal Government to bend over backwards in order to collect taxes is somewhere between 2-2.5% of all retail transactions – probably even less when you consider that at least some of these sales will have order values above the threshold and therefore attract GST anyway.

Even after the Productivity Commission appointed by the government to research the possibility of lowering the threshold discovered it would be too expensive to actually collect this tiny amount of tax, still retailers believe this will be the source of their salvation.

Yes, I agree that lowering the GST threshold will improve Australian retailers’ competitive potential – but only fractionally. In fact, having a half-decent website and a one-page checkout would probably do more for them than any amount of legislation – but let’s not get carried away.

Do you still believe that enforcing a tax on less than 2.5 percent of Australian retail sales can save bricks-and-mortar businesses?

6 Comments

    • Kate Morris
    • 4th July

    Campbell, do those Mastercard survey figures include online ticketing and travel (e.g. airlines)? I think these tend to skew the local figures.

    Reply
  • Hi Kate,

    Unfortunately I would have to contact MasterCard directly to confirm your suspicions – however, I believe you are correct and that could well affect the way we view this data.

    That being said, I believe the point that the MasterCard data makes is sound, which is that most Australians are conscious of the need to support local retailers and local industries. This highlights the importance of value and convenience over and above a simplistic price argument when trying to attract Australian consumers.

    Reply
    • Sean Williams
    • 4th July

    The Australian governments figures on the impact of GST (like the majority of government stats) are skewed, the cycling industry in Australia for instance is experiencing a full on attack from overseas markets, the figure of 2.5% doesn’t do justice to the real impact being felt by retailers, a few overseas online retailers amount to a massive slice of the total online and retail sales here in Australia, and 10% GST does make a big difference to making a sale and not making a sale, some customers buy overseas when savings amount to just a few dollars. The cycling industry, I’m sure is not the only industry that is experiencing this, the government has it’s own reason to icing over the real impact of GST and will continue to do so until it is too late to re-act.

    Reply
      • peter
      • 4th July

      totally agree Sean. when I hear about overseas on-line purchases being a very small percentage of overall retail I just shake my head at how statistics are used by those who have a bricks and mortar axe to grind.
      the statistics by businss category or product category tells a much different story. books, music, sports equipment, dvds, games, fashion, shoes to name but a few are a very much larger percentage and interestingly as a lot, if not most, of these items are a low dollar value the lowering of the GST threshold will not affect the volume of business being done offshore.
      Ironically, it is also these low dollar items where the GST can make the difference between local retailers being competitive or not being competitive.
      The other question that no one seems to address is why the Australian tax payer is subsidising the postage of overseas on-line retailers. When it costs significantly more to post an item from Melbourne to Sydney than from London to Sydney something is out of kilter.

      Reply
    • Russell
    • 19th July

    My my my….all that Gerry Harvey bashing and now you come out and say that you happen to agree! Talk about seeing the light, or the penny dropped but I suppose better late than never.
    Here’s hoping those in Government will also see the light and do something about our struggling
    retailers and at least level the playing field some.

    Reply
  • I think it is worth pointing out that this article is about the collection of state levied sales tax in the USA. Where state sales taxes vary from one state to another. We do not have this issue in Australia. GST is national and is levied on online purchases from Australian companies. As has been pointed out the collection of GST on low value purchases from overseas is said not to be economically viable; however I am sure it could be done by data collection from banks and Paypal the same way NAB collects it stats. on online purchases. Link this to your tax file number and send out a GST bill at the end of each financial year.

    The real issue for retail stores vs. online is that there is now international price transparency and the manufacturers are now being caught out with their differential pricing around the world. Using the bike parts example, one online retailer I have worked with pays a higher wholesale price for parts from the manufacturer than I can buy the same item landed in Australia from an overseas based online retailer. Last night I bought 6 Oral B toothbrush heads from Coles for $44.40, I later checked Ebay and you can get 20 of the same item for $20 with free delivery! That’s $1ea online (including GST) vs. $7.40ea in the store.

    So the argument that the lack of GST on international online sales is fuelling the online boom and the demise of the retail store is, and always has been a complete furphy. Retailers are caught in a wave of technological and social change. Lewis and Dart in “The New Rules of Retail” predict that 50% of retailers will ultimately disappear as their businesses become unsustainable. If you are a retailer and wondering what to do this book is a good place to start.

    Reply

Leave a Reply

  • (Required)

  • (Required but will not be published)

Power Retail Ecommerce Resources