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W&L Professor Examines Pros, Cons of Marketplace Fairness Act

When Robert Ballenger was looking for a new gas grill, he found the one he wanted at a local store. Then he went online, where he found the identical grill for $130 less.

“It’s the same, exact grill,” he said. “The only question was: Did I need it today? Or could I wait for it to be delivered?”

Ballenger is a professor of business administration at Washington and Lee University, where he specializes in e-commerce issues. So he uses his grill-buying experience to illustrate the dilemma that faces many brick-and-mortar stores — a dilemma that will not, he suggests, be solved simply by adding state sales tax to all online purchases.

This past Monday, May 6, the U.S. Senate passed the Marketplace Fairness Act, which would require online sellers with more than $1 million in annual revenue to collect sales tax on transactions across state lines. Now the legislation moves to the House of Representatives, where a battle is said to be brewing.

Ballenger believes the bill’s fate will most likely hinge on whether or not state governors, especially Republican governors, can push hard enough on their need for the income — estimated at $23 billion in 2012 — that their states would receive from the sales tax.

Another aspect of the discussion is fairness. “The issue you hear with sales tax on these purchases has to do with creating that level playing field,” said Ballenger. “Mom-and-Pop stores have had to collect sales tax on day one on sales in their states. So they are immediately at a disadvantage against online stores that do not charge that tax. That is a disadvantage. It’s absolutely true.”

Another disadvantage isn’t always included in the conversations. “They talk about this legislation helping the brick-and-mortar stores. I don’t know how true that is,” said Ballenger. “The simple fact is that brick-and-mortar stores are innately at a disadvantage to online stores in terms of price.”

Had the law been in effect when Ballenger was grill shopping, he would have had to pay an additional $30 or so in sales tax. He would still have saved around $100 on the purchase, and that, he thinks, is probably enough to cause him, along with many, if not most, other shoppers to go the Internet route.

“Some people will pay more to buy locally, to give back to the local economy,” said Ballenger. “But there are a whole lot of people who won’t.”

More and more, Ballenger said, consumers are engaged in the practice of “showrooming” — visiting a local store to examine an item, perhaps getting advice on a purchase from the store’s customer service representative, and then going home to shop via computer.

“This whole ‘showrooming’ effect has had a significant effect on Mom-and-Pop stores. It’s also had an effect on big box stores, particularly Best Buy,” said Ballenger.

By taking advantage of customer service representatives at brick-and-mortar stores, customers help online stores keep their overhead down, since they don’t need a customer service representative to wait on every potential buyer.

“From the number of people you need, to the kind of space you have to rent, the very nature of the amount of overhead that an online store has to have is so significantly less that there is an inherent disadvantage,” said Ballenger. “The online business cannot only lower its price, but may be making a greater profit while doing that. It’s really harder for a brick-and-mortar store to compete unless they offer something unique in terms of customer service, in terms of the items they’re selling, in terms of the variety of things they may have to offer.”

The sales tax bill has interesting political elements, noted Ballenger. On the one hand, people are listening to the small businesses’ complaints about fairness; on the other hand, they are hearing some conservatives argue that this represents a new tax. “So they may want to promote business and vote for the sales tax, but then there is the camp that is so anti-new-tax that they would rather say no than level the playing field,” said Ballenger. “It’s an interesting set of political alignments within the Republican party.”

That’s why Ballenger looks for Republican governors to be important players by putting pressure on Republicans in the House.

“The states really want this. That may be the way that it ends up getting through,” said Ballenger. “The argument the states will make is that this is a tax that we’ve always had in place. It’s just an easier way for us to collect it, a more fair way for us to collect it. If they can win that argument at the end of the day, then I think that could be a winning argument.”

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