On March 22, 2013, the Senate passed the Marketplace Fairness Act by a broad and bipartisan margin of 75 to 24 votes. It hasn't passed the House of Representatives and it hasn't been signed by the president yet, so it isn't the law of the land, but likely will be. When it passes, it will have wide ranging impacts on American business, and specific impacts on two key types of commercial real estate.
Understanding the Marketplace Fairness Act
When it passes, the Marketplace Fairness Act will require online retailers to collect sales taxes on every transaction and remit them to the state in which the purchaser lives. Currently, most online retailers only collect sales taxes on sales made in states where they have a physical presence. Paying "use" taxes on out-of-state purchases is the responsibility of the purchasers, and compliance has historically been low. The Marketplace Fairness Act will fix the problem and make every sale subject to sales tax. If it passes, it will change the economics of online shopping.
The Winners: Brick and Mortar Retail
A $25.00 book at a store in a state with six percent sales tax actually costs $26.50. When it's ordered from Amazon.com with free shipping, it costs $25.00 and sometimes less. The passage of the Marketplace Fairness Act will level out some of those price differences. It remains to be seen if the change will impact the ongoing short towards purchasing online, but, given the broad support for the law among the small business community, many business people feel that it will helpful.
With this in mind, it's reasonable to expect that store closings will slow. At the same time, we could also see increased demand for retail space as customers return to stores. The instant gratification that shopping in a traditional retail outfit offers could become more attractive as the pricing differential between bricks-and-mortar and online retail closes.
The act could prove to be particularly helpful for bricks-and-clicks operations that have both physical presences and a large online presence. These companies are at a particular disadvantage competing with online-only retailers since they already have to collect sales taxes due to their broad geographical footprint. The Act will level the playing field for them.
The Losers: Small-State Distribution Centers
Some online retailers, like Amazon have already begun preparing for tax code changes, and even welcome the new laws. In fact, it will bring them a significant benefit. They will be able to site their distribution centers to best serve their customers instead of having to choose locations that help them avoid having sales tax liability in states with large numbers of customers. This could lead to a significant shift in demand for distribution center space with centrally-located properties becoming attractive regardless of the state in which they are located. If the Marketplace Fairness Act leads to a resurgence in offline sales, it could further spur demand for conveniently located distribution space, as local retail businesses will need better access to inventory.
Ultimately, the Marketplace Fairness Act will have much broader ramifications than just adding a few dollars to o0Companies that are in industries that will be impacted by it would do well to begin the process of building strategies to protect against or capitalize on the changes that it will bring. Getting a head start now will help them to be ready when the change occurs.
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