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Groupon could be hurt, but brick and mortar shops could be helped by new bill

Tuesday, Jun 3, 2014

* A bill passed by both chambers to “fix” the so-called “Amazon Tax” may have some unintended consequences for one of Chicago’s most famous tech companies

llinois is poised to re-impose sales taxes on some Internet purchases, seven months after the state’s so-called Amazon tax was struck down by the Illinois Supreme Court.

Brick-and-mortar retailers hailed the move while online firms expressed dismay.

“It’s obviously extremely disappointing,” said Brian Littleton, president and CEO of Chicago-based Inc., a provider of affiliate marketing network software. He said firms that started offering coupons again in Illinois since October’s ruling will again be forced to leave the state or shut down.

This time around, he said, it could affect Chicago’s Groupon Inc., which started offering coupons last fall. A Groupon official said in an email that “we are indeed looking closely at the implications of the law for our new Freebies business.” […]

When Illinois first enacted its Amazon tax, hundreds of Web marketerssuch as Coupon Cabin moved from Chicago to Indiana or Wisconsin, and hundreds went out of business after roughly a thousand retailers nationwide stopped doing business with some 9,000 Illinois-based affiliated websites offering coupons or promotional codes.

* Groupon’s stock is falling because of this bill

Shares of Groupon Inc. (GRPN_) are down -4.74% to $5.60 after it was reported that an Illinois sales tax law originally targeting (AMZN_) could be brought back after it was struck down by the state’s top court.

Groupon has been struggling for a while, however. From TheStreet

We rate GROUPON INC (GRPN) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover.

The company’s weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.

* But retailers have been suffering as well because of untaxed online competition

Brick-and-mortar retailers, which are left with pricing challenges when their e-commerce counterparts are not taxed, naturally welcomed the move. Rob Karr, president of the Illinois Retail Merchants Association, had this to say about the proposed law: “This legislation is another step in leveling the playing field for brick-and-mortar retailers along with residents of Illinois who are being unfairly penalized for purchases made out of the state.”

The sales tax immunity that Internet retailers currently enjoy has been subject to criticism by traditional retailers, who argue that it puts them at a distinct disadvantage. Amazon, by far the biggest beneficiary of this tax exemption, has accumulated a huge customer base by offering prices that are lower than traditional retailers’.

Best Buy Co Inc (BBY), which has strategized its turnaround plan around a price-matching policy, has been quite vocal about this “discriminatory” tax policy. Hubert Joly, the French veteran leading the electronic retailer’s turnaround, said that he did not think the government should “pick the winners.” Speaking at the Economic Club of Minnesota, Joly disagreed with the government’s policy to “subsidize” Amazon and eBay, and said that the former enjoyed an 8-10% price advantage over brick-and-mortar retailers as a result of this tax exemption.

After Florida imposed a sales tax on Amazon last month, it became the 21st state to collect taxes from the electronic giant. According to research from Ohio University, Amazon lost an estimated 9.5% of revenues in the states where taxes were enforced on the company, as customers switched to those online retailers that were not required to pay taxes. The research does suggest that this exemption of sales taxes creates a slanted retail environment that provides an unfair advantage to online retailers.

- Posted by Rich Miller        

  1. - jerry 101 - Tuesday, Jun 3, 14 @ 11:08 am:

    Groupon was always destined to fail - its business model was too easy to replicate. Groupon’s IPO was an example of an updated version of the old “pump and dump”, rejiggered as a private equity exit strategy. Convince the gullible investors of the world that Groupon was the next BIG thing and was going to be worth gajillions of dollars, so you’ve got to get in on the IPO, pump up the IPO price as high as possible, then sit back and make money as lockup periods end and the stock price falls like a rock as the company goes down in flames.

    Other examples: Zynga, Facebook, Twitter.

    Internet purchases should not be exempt from sales tax. Why should internet companies be given such a serious competitive advantage over brick and mortar retailers that actually employee Illinoisans? The sooner this is done, the better. It’ll also benefit the state’s coffers a great deal.

  2. - A guy... - Tuesday, Jun 3, 14 @ 11:17 am:

    It’s not just these brick and mortar companies that are “losing out”, it’s the states and municipalities that are denied legitimate sales tax. This was an “expectation” prior to internet sales taking advantage of the loop hole. They’ve ridden the wave long enough. Pick who you want to ‘leave’ the state; internet retailers who don’t contribute to the sales tax base, or deeply rooted brick and mortar locations that collect and pay sales taxes every day. I doubt you even have to really choose. Let the internet companies adjust to collecting and paying sales tax. It’s not that hard. My prediction is that every state with a sales tax will follow suit once the tide turns.

  3. - Arizona Bob - Tuesday, Jun 3, 14 @ 11:19 am:

    Wow. Talk about sending a message to any tech or online retailing businesses considering moving (or staying) in Illinois.

    If your service or product works on thin margins, or your retail costs are based on very small margins and frequent product turnover (like canned foods), Illinois is definately NOT the place to be.

    Let’s see, first the Dems kill the Illinois trucking industry (Blago), then they kill the coal industry (Obama), they’re obstructing energy production through fracking (Quinn), they prohibit Wal Mart from locating in Chicago in underserved neighborhoods because they won’t make union corruption deals (Daley), and now they’re killing internet retailing here (Quinn).

    And we wonder why Illinois has amongst the worst unemployment problem in the nation?

    Who we elect affects our lives in a big way. This still hasn’t sunk into the minds of the “blue” voters in this VERY “blue” state.

  4. - Realist - Tuesday, Jun 3, 14 @ 11:28 am:

    Brick and mortar stores get plenty of incentives too. They are called TIFs and enterprise zones

  5. - Bill White - Tuesday, Jun 3, 14 @ 11:38 am:

    AZ Bob

    You have this exactly backwards.

    This tax affects out of state businesses who come here to capture our retail sales without locating their business and employees here.

    IL based companies already are liable for IL sales taxes, even on on-line sales.

    Without this law, IL tax policy encourages on-line retailers to keep their physical presence (buildings and employees) outside of IL even as they market to IL customers.

    This bill is pro-IL business.

  6. - Bill White - Tuesday, Jun 3, 14 @ 11:39 am:

    Let’s see if Amazon now cancels those two Florida warehouses.

    === On Thursday morning, the people of Florida lost a tried-and-true method of tax evasion: placing orders on Amazon. Florida is joining 20 other states that collect sales tax on Amazon purchases, meaning just about everything bought there through the everything store will now cost 6 percent more. The change comes because Amazon is planning two new warehouses in Florida, which will give it the so-called physical presence required for the state to mandate that it tack sales tax onto orders. ===

  7. - Arizona Bob - Tuesday, Jun 3, 14 @ 11:45 am:

    =“This legislation is another step in leveling the playing field for brick-and-mortar retailers along with residents of Illinois who are being unfairly penalized for purchases made out of the state.”=

    This seems to contradict your statement, Bill

  8. - A guy... - Tuesday, Jun 3, 14 @ 11:47 am:

    You’re not exempt from paying sales tax. Retailers who have a physical presence in a state are “required” to collect it at point of sale. The internet companies have been taking advantage of no physical presence to take advantage of not being “required” to collect. Technology is well advanced enough for this to be rectified. You want “in” our market of consumers, then collect and pay sales tax. 20 states, including big ones have caught up to them realizing billions of sales tax dollars lost nationwide. Look for the remaining 30 to catch up quickly. No one can afford the loss of sales tax revenue, nor the disincentive of actually building, renting and maintaining real retail outlets.

  9. - Rufus - Tuesday, Jun 3, 14 @ 11:52 am:

    since the law was struck down last time, Why will the law work this time

  10. - Steve - Tuesday, Jun 3, 14 @ 12:03 pm:

    Whenever you hear “leveling the playing field” from an Illinois politician, you’ve got to get cynical. Brick-and-mortar stores have the advantage of allowing the customer to bring home the merchandise on the spot, something the internet doesn’t offer. The problem many Illinois merchants have is Illinois is a high sales tax state for many businesses. The extreme example is Michigan Ave. in downtown Chicago. If Illinois had a better sales tax structure even Amazon would want to have employees in Illinois. The politicians that run Illinois have a bad reputation , well earned , by the business community. It always about raising taxes instead of cutting spending. Illinois taxpayers have money for private theaters but not lower taxes.

  11. - Bill White - Tuesday, Jun 3, 14 @ 12:11 pm:

    AZ Bob

    Out of state retailers have an unfair advantage over local presence retailers because it’s easier for purchasers to avoid paying sales tax if they buy from out of state.

    That creates a disincentive to locate physical facilities in Illinois.

  12. - Steve - Tuesday, Jun 3, 14 @ 12:14 pm:

    New Hampshire doesn’t have a sales tax. Wouldn’t that be nice? They also have better public schools than Illinois.

  13. - mcb - Tuesday, Jun 3, 14 @ 12:17 pm:

    Everyone seems to be missing the two biggest points of this law. First, it only applies when the purchase involved a coupon from Illinois. Illinois can’t tax online purchases from businesses with no presence in Illinois. It’s terrible that this is called an Amazon tax because neither this law or the previous version resulted or will result in a single cent of taxes on Amazon purchases.
    Second, the only thing this does is cause the Illinois coupon and marketing affiliates to close or move. Amazon shut down the whole affiliate marketing program to Illinois businesses and they will simply do it again. Read the above articles, this literally caused hundreds of companies to move or shut down. This is absolutely horrific legislation that will only cost Illinois money and jobs.
    If you want to tax online purchases, that’s a great idea. But it has to be done at the federal level because of federal law.

  14. - VanillaMan - Tuesday, Jun 3, 14 @ 12:29 pm:

    WANTED: Geese that lay golden eggs.
    OFFER: Uh - no offer. Illinois needs geese that lay golden eggs. We don’t know how the geese do that, and aren’t geese, but we know we need the gold their eggs contain. What we do know is that we’re broke and need more gold and all our other geese are either dead, dying or have flown off.

    Uh - come to Illinois so we can fleece your geese?

  15. - Demoralized - Tuesday, Jun 3, 14 @ 1:40 pm:

    @Arizona Bob:

    One of your hero states - Texas - collects internet sales taxes. You are always saying we need to be more like Texas.

  16. - Clevelander - Tuesday, Jun 3, 14 @ 2:08 pm:

    Just another case of the vested interests (those who have their money tied up in brick & mortar retailers) using the legislative process to strong arm those who didn’t make the same decision, or mistake, however you look at it.

    There are some, myself included, who do not accept the premise that a transaction between private parties owes the state of Illinois a share of the proceeds of that transaction.

    This is a fundamental disagreement, and if we were involved in constitutional debate to politically bind those who believe as I do to those who believe the state has a right to get a share of every private transaction, I would not enter into the association.

  17. - Demoralized - Tuesday, Jun 3, 14 @ 2:31 pm:

    ==There are some, myself included, who do not accept the premise that a transaction between private parties owes the state of Illinois a share of the proceeds of that transaction.==

    The state has a legitimate interest in regulating commerce. It’s in the Constitution. You’ve basically just said that you don’t accept sales taxes at all.

  18. - Wumpus - Tuesday, Jun 3, 14 @ 2:52 pm:

    HAve an idea, we vill crush you!

  19. - Clevelander - Tuesday, Jun 3, 14 @ 5:03 pm:

    ==The state has a legitimate interest in regulating commerce. It’s in the Constitution.==

    Just because it’s in the constitution doesn’t end all debate. Consider that it’s been amended 27 times. Illinois wrote what, its 3rd Constitution in 1970. As I mentioned, I personally wouldn’t agree to a constitution where the state believed it had the right to stick its nose and hands everywhere.

    ==You’ve basically just said that you don’t accept sales taxes at all. ==

    Yes. Me, the federal government, and the states of Delaware, Oregon, New Hampshire, Montana, and Alaska.

  20. - Precinct Captain - Tuesday, Jun 3, 14 @ 6:31 pm:

    ==I personally wouldn’t agree to a constitution where the state believed it had the right to stick its nose and hands everywhere==

    Maybe you should be donating

  21. - Clevelander - Tuesday, Jun 3, 14 @ 8:11 pm:

    ==Maybe you should be donating

    Thanks for the idea. I can send what I save on internet sales tax before this bill passes lol.

  22. - Demoralized - Tuesday, Jun 3, 14 @ 8:23 pm:

    Actually @Clevelander you’re breaking the law by buying things on the internet and not paying Illinois state sales tax.

  23. - RNUG - Tuesday, Jun 3, 14 @ 10:21 pm:

    If you are an Illinois resident and purchase an item over the internet, you are legally responsible to pay the sales / use tax on it. The only question is who is responsible for collecting it, the seller (which this bill addresses) or the buyer.

    Illinois residents are supposed to pay the tax on IL 1040 line 23 - Use tax on internet, mail order or other out-of-state purchases. This is after all the credits, so you owe this tax even if you do not owe any Illinois tax on your income.

  24. - how to jump higher - Wednesday, Jun 11, 14 @ 6:22 am:

    Normally I don’t learn article on blogs, however I would like to say that this write-up very pressured me to take
    a look at and do it! Your writing taste has been amazed me.

    Thanks, quite nice article.

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