Which sales channel experienced the greatest growth in natural products sales last year? If you guessed online outlets, you were right. E-commerce sales of natural and organic products increased a robust 14 percent in 2010, according to Natural Foods Merchandiser’s 2011 Market Overview. As e-tailers continue to grab more sales in many retail categories, states are taking notice and beginning to demand a piece of the tax pie.
California recently became the seventh state to pass a law requiring online retailers to collect sales tax from shoppers. The legislation requires all large out-of-state e-tailers with some affiliation in California, such as having employees and warehouses located in the state, to collect sales tax on purchases. The law is expected to raise an estimated $317 million for cash-strapped California.
Some online outlets are calling the law unconstitutional and seeking to have it overturned. Internet giant Amazon.com has been gathering signatures, hoping to obtain the 500,000 necessary to get a measure overturning the law on the California ballot next June, the Los Angeles Times reports. Not surprisingly, the company is targeting popular brick-and-mortar stores to collect signatures and rally supporters.
“Petition workers are swarming popular commercial hubs including Larchmont Village in Los Angeles, Colorado Boulevard in Pasadena and the Gaslamp Quarter in San Diego as well as Ralphs, Trader Joe's, Target and other major retailers—many of which have lost sales to Amazon," said the LA Times.
Industry mixed on e-tailer sales tax
Although one may assume that offline retailers would support the new California law, that's actually not the case—including in the natural products industry. "Some [natural products] retailers have online stores and want the price advantage [of no sales tax]," says John Gay, executive director and chief executive officer of the Natural Products Association. Furthermore, some e-tailers in the industry feel they are at a competitive disadvantage with physical stores, he adds.
Still, as Gay is quick to point out, many retailers are in favor of measures that would collect sales taxes on e-commerce purchases. Jimbo Someck of Jimbo's Naturally in Southern California sees some merit in the law. "The proliferation [of e-tailers] has certainly impacted our business, especially with supplement sales," he says. "When you're buying a $50 product and can go on to Amazon and save the eight or so dollars in taxes, that puts us at a disadvantage."
Supplement manufacturers don't have as much to lose as retailers, some experts say. "The big issue for supplement manufacturers at this point is price integrity. They don't want to have to go out and police e-tailers giving 30 or 40 percent discounts," explains Patrick Rea, publisher and editorial director of Nutrition Business Journal.
Ken Whitman, president of supplement manufacturer Natural Vitality, says he sees both sides. "It's hard to have an official stance because we do business with both [e-commerce and brick-and-mortar retailers]," he says. "Vitamin Shoppe, for example, is both brick-and-mortar and an e-tailer."
Sen. Dick Durbin (D-Ill.) has introduced a bill that would allow states to require online retailers to collect sales taxes—including in those states where those e-tailers are not physically located.
This measure has Amazon's backing. “Amazon.com has long supported a simple, nationwide system of state and local sales tax collection, evenhandedly applied to all sellers, no matter their business model, location or level of remote sale," Paul Misen, Amazon's vice president for global public policy told The Hill, a Congressional newspaper.
The retail trade groups National Retail Federation, International Council of Shopping Centers and Retail Industry Leaders Association support the measure.
For now the NPA is not taking an official stance on the issue. "Currently, the NPA needs to stay focused on issues that affect health food retailers because they are health food stores; we will be engaging in issues like NDI guidance and the Hatch bill," Gay says.
Regardless of taxes, Natural Vitality's Whitman says brick-and-mortar stores have to reinvent themselves to provide an advantage to customers that online shopping can't deliver. "Even if online guys charge sales tax, the convenience and customer service of places like Zappos will still be attractive to a growing number of shoppers," Whitman says. "I don't think Borders went out of business because Amazon didn't charge sales tax in California."