When Erika Righter saw foot traffic at Hope Tank vanish in March as coronavirus safety measures went into place, she temporarily closed her Broadway gift store and reopened online.
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“Thank God for online,” said Righter, who opened the Denver store in 2012. “I launched an online shop, which I wish I had done years ago.”
Selling online offset some lost sales, though not enough to cover her rent. As she prepares to reopen for in-person sales on June 11, she’s keeping the online store, but also reconfigured the space to include manufacturing laser-etched home products and a space to record community meetings.
Like many local shopkeepers, she’s struggling with uncertainty — are shoppers ready to return, will employees come back to work and is the city or state going to come to her aid with financial support or, specifically, reserve two spots on every block in both directions so customers can park to pick up orders curbside?
“We’ll still do online, we’ll still be doing lots of curbside and we’re getting more creative about how we do it,” Righter said. “But again, that’s why we really need to think about how we are pushing traffic towards these businesses because in order to fund a lot of the stuff, you need the sales tax.”
The ongoing pandemic is shaping up to be one of the roughest economic periods any living Coloradan will get through, with the hardest hit industries in the state being retail, restaurants and tourism. Many small businesses that are reopening are spending even more to make their stores safe and purchase personal protective equipment — often at jacked-up prices, which Righter discovered when she surveyed her network of women and minority-owned businesses about the impact of COVID-19.
Local governments are also looking to curb costs, with the city of Denver asking its own landlords for a break and making its 13,000 employees take eight unpaid days off to make up for an expected $226 million in tax-revenue losses. Likewise, the state of Colorado is facing a $3 billion shortfall for the current and next fiscal year.
But there may be one small glimmer of financial hope: Sales tax.
The state is taking in more sales tax than ever before now that online sellers, such as Amazon, charge Colorado customers at purchase. Last year, Colorado collected nearly a half-billion dollars more in annual sales taxes than in 2016, when Amazon began the practice. With more brick-and-mortar stores also going online and ecommerce seeing an overall increase, the pandemic impact on the state sales taxes wasn’t as bad as you might have expected.
In a May report, the Governor’s Office of State Planning and Budgeting revised its 5% sales tax growth expectation to a 1.8% drop this fiscal year.
“Social distancing measures have resulted in reduced day-to-day fiscal transactions,” the report says. “Sales tax collections from online retailers, however, will result in higher tax revenues than would otherwise have been collected.”
The Amazon tax
Colorado’s collection of general sales tax each month has risen steadily in the past decade. Credit the recovery from the Great Recession, plus the state population growth. More consumers are buying more stuff — and paying sales tax on their purchases.
But another factor is the 2010 state law that required out-of-state retailers like Amazon to help customers keep track of online purchases and pay the sales tax at tax time. Previously, out-of-state retailers didn’t collect state sales tax, giving them an advantage over brick-and-mortar retailers. The National Conference of State Legislatures put Colorado’s “uncollected use tax from remote sales” at $352.6 million in 2012. For the nation, the amount was $23.3 billion.
Amazon and the direct-marketing industry association fought the so-called “Amazon Tax” law for years. But in February 2016, Amazon began collecting sales tax on purchases made by Colorado customers. A few months later, the company opened its first warehouse in the state and hasn’t stopped expanding physically in Colorado.
Amazon now collects sales tax in 46 states plus the District of Columbia and Puerto Rico. Last year, it collected and remitted nearly $9 billion in sales and use taxes to states and localities in the U.S. And its sales have increased during the pandemic: Revenues jumped 26% in the first quarter from a year earlier as consumers faced stay-at-home orders and hunted for toilet paper. Amazon now projects second-quarter sales at 18% to 28% more than the year-ago period.
Online retailers are now required to collect sales tax on purchases, after the U.S. Supreme Court ruled in South Dakota v. Wayfair Inc. in 2018 that states may charge tax on purchases from out-of-state retailers.
In Colorado, annual sales tax revenues reached $3 billion in fiscal year 2019, which ended last June. The sum excludes sales tax collected on retail marijuana and gas purchases, and was up 5.1% from the prior year.
The state also doesn’t share how much companies pay and doesn’t break down taxes paid by online or brick-and-mortar retailers. But since Amazon began charging Colorado customers sales tax at the time of purchase in 2016, Colorado collected $436 million more in sales tax last year compared to 2016.
“Online sales certainly have helped,” said Brian Lewandowski, executive director of the Business Research Division at the Leeds School of Business at the University of Colorado. “That’s welcome new money that they would otherwise be foregoing. And we know that ecommerce was chipping away at brick-and-mortar sales anyway, so the fact that they’re able to collect some of that revenue also buffers the decline that they would otherwise be seeing right now.”
Sales in the time of COVID-19
Tattered Cover Book Store rearranged its stores in March to handle incoming online orders. “Our bookstores have really become warehouses in the last two-plus months,” owner Len Vlahos said.
The bookstores have not yet reopened to customers. But on Sunday, it had its largest sales day ever, with customers buying books online about conversations on racism, including top-seller “How to Be an Antiracist,” by Ibram X. Kendi. The big day coincided with the protests and riots in Denver and nationwide after George Floyd, a black man, died while in custody of the Minneapolis police.
“When we closed on March 16, beginning pretty much immediately after that our web sales increased, depending on the day, by a factor of 10 or more. So that has absolutely offset some of the losses,” Vlahos said. “However, it hasn’t nearly offset our losses overall. I mean overall, Tattered Cover’s business is down about 75%, even with the massive boost in online sales.”
Retail sales are still pretty bad. Last month, the U.S. Commerce Department said that retail sales fell 16.4% in April, after falling 8.3% in March. Total sales, which includes restaurants and bars, were at the lowest since 2012. The hardest hit retail industries were clothing and accessory stores, down 89.3% from last year.
But online sales are up. Market research firm Adobe Analytics points to the no-duh conclusion that when people are forced to minimize social contact, they spend more time and money online. That boosted U.S. ecommerce sales 49% in April compared with April 2019, according to Adobe’s Digital Economy Index.
Retailers aren’t thinking about sales tax right now, said Richard Auxier, a senior policy analyst with the Urban Institute Tax Policy Center. They’re still trying to figure out how to survive.
“The economy was, for all intents and purposes, shut down for the past two months. This has caused absolute hell for consumers, employers and governments,” Auxier said. “The overall thing is, and Amazon is a good example, there are businesses that are doing just fine in this environment. But what’s probably more likely for anyone who is not Amazon is maybe your online sales are up, but you’ve been obliterated because there’s been no retail sales tax that you could possibly collect.”
Sales tax is seen as a way to avoid raising other taxes, says the Tax Foundation, a tax-policy think tank in Washington, D.C. It’s pushing states to broaden their sales tax base.
“Historically, sales tax collections have proven far more stable than income taxes during recessions since taxable income drops much more precipitously than consumption when the economy is weak,” the Tax Foundation points out in a brief about how states could recover from COVID-19’s economic devastation. Some suggestions? Add groceries and digital goods to the list of taxable items.
State sales tax decline: No more than 10%?
Colorado collected $217.9 million on sales in March, down 15.2% from last March, according to the state’s General Fund Net Tax Collection data. However, more payments have trickled in and will show up in April numbers since businesses were given a one-month extension due to coronavirus devastation.
There are other things that will help improve this year’s sales tax income. A new law, House Bill 1240, went into effect in June 2019 and requires out-of-state retailers to collect and remit sales tax if they had more than $100,000 in annual sales.
Another bump went into effect in October that allows the main retailer running a marketplace of stores, such as Amazon’s third-party sellers, to collect sales tax on behalf of the smaller sellers and pay it to the states. The state said it can’t share whether Amazon started paying up in October or had implemented it prior. But Amazon says it is doing this now in 41 states. And the state’s monthly sales tax collected in October grew 9.2% from the prior year.
Both measures are based on the 2018 Wayfair decision and were estimated to bring in an extra $40.5 million to $47.2 million in tax revenue this fiscal year, and up to $65.7 million next fiscal year.
“That has undoubtedly expanded the people who are collecting our tax and we’re collecting more taxes as a result,” said Josh Pens, director of tax policy analysis at the state Department of Revenue.
The agency does not make sales tax projections.
But before COVID-19-related closures, the state’s Legislative Council Staff had forecast sales tax receipts would increase 5.3% to $3.2 billion this year, then rise another 1.9% next fiscal year. In May, staff revised the estimate to be down 1% this fiscal year and then drop 8.6% next fiscal year. It would start growing again in fiscal year 2021-22, at 5.3%.
Likewise, the Governor’s Office of State Planning and Budgeting revised its expectation of sales taxes for the year, down 1.8% this year, with steeper declines of 5.6% next fiscal year because of the ongoing impact on hotels, car sales, retailers and food and drinking places. They expect it to return the following year with a 9.9% growth.
“They are super well informed and they have people who are devoted to just sales taxes,” said Lewandowski, with CU. “I have a wide range of sales tax outlooks, and in some of our scenarios we’re looking at more than a 10% decline in sales tax revenue and in other ones we’re looking at less than a 10% decline. So what they’ve published I don’t think looks unreasonable, but we can’t really say if it’s high or low.”
Righter, the owner of the Hope Tank gift store, hopes that some of the sales tax benefits flow into her neighborhood to help small retailers.
But she’s taken it on herself to change what she can by meeting with other business owners, sharing COVID-19 reopening tips, and reminding Coloradans to shop local (“If you’re going to be buying gifts, you should be supporting local, you shouldn’t be getting people a Target gift card,” she said.)
A few years ago, she created a guide to shopping at women and minority-owned businesses in Denver at the Hope Slinger’s Guide to Denver. And as COVID hit, she launched a fundraiser to hire artists to paint murals on plywood boarding up neighborhood stores.
“Last month, our income was down almost 70%, I mean these are real numbers that are terrifying,” Righter said. “And obviously on Broadway, we have a different scenario where most of us, a huge portion of our income comes from foot traffic. It’s had a massive, massive impact. Massive. For me, I just literally couldn’t afford to reopen yet.”