Black Friday, Internet Retailing and the Tax Base

by James A. Bacon

As millions of Americans plot their insane Black Friday retail rush, trampling over one another to reach the best deals in Wal-Mart and Target, millions of other Americans are planning to sit at home and shop online. Who needs the risk of getting crushed like a fallen participant in the Pamplona running of the bulls? After a couple of clicks, you can have the object of your heart’s desired delivered by UPS to your home.

Music stores… gone. Video stores… gone. Book stores… fast disappearing. Any product that can be digitized is selling over the Internet. Even categories such as apparel once thought immune to Internet disruption are seeing innovative business models that dispense with the need for bricks and mortar. According to the latest numbers from the U.S. Census Bureau, total retail sales for the 3rd quarter of 2012 increased 4.6% over the same quarter in 2011. E-commerce sales increased four times faster — 17.3% — over the same period.

Source: U.S. Census Bureau. Click for more legible image.

E-commerce now accounts for 5% of all retail sales in the United States, and the trend line shows no sign of slowing. Some prognosticators say e-commerce market share could reach 25%. That spells bad news for traditional retailers who will have to find ways to reinvent themselves. But it spells equally bad news for state and local governments that have relied upon sales and property tax revenues to buttress their tax bases.

Rest assured, the retail industry will reinvent itself. Some retailers may fall by the wayside but others will spring up to take their place. If nothing else, retailers understand that they are facing disruptive change. That message has not yet penetrated local government.

The problem isn’t the loss of sales tax revenue. Conceptually, that’s easy to remedy — just tax online sales. There are complications with taxing e-commerce, to be sure, but eventually something will have to be worked out because state and local governments could not long survive without that revenue source. The tricky part will be replacing lost property tax revenue as retailers shed retail space.

An increasing share of retail product will move directly from warehouse/ distribution centers by delivery truck to people’s homes, bypassing stores entirely.  The result will be more lumpiness in the distribution of tax revenue. In the past, property tax revenue accrued to the localities where the stores were located. In the future, property tax revenue will accrue increasingly to localities where the and other e-tailer distribution centers are located. Localities seeking to expand their tax base would be well advised to target the logistical sector.

While bricks-and-mortar retail will never disappear, there may be a lot less of it, and it may take very different forms. Big box stores seem to be on the way out. Old-style malls are being torn down. Even shopping centers, dependent as they are upon automobile traffic, may find their markets increasingly limited as car ownership becomes more expensive and Americans shift to other transportation modes.

There is little sign that Virginia localities have begun to re-think their comprehensive plans to reflect emerging retail realities. No one can say with certainty how these trends will re-shape land use patterns, but one conclusion seems safe: land use patterns will change. Unless localities can find a crystal ball that foretells the future, their best bet is to become more flexible, allowing for innovative and unexpected land use combinations dreamed up by developers and retailers in search of the next big thing. Clinging to the status quo is a guarantee of failure.