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Online sales boom poses challenges for Colorado tax forecasting — and for brick-and-mortar retailers

A 91% annual increase in e-commerce in Colorado last year is promising big changes to the state's retail landscape. “We are seeing trends that are not just going to be unique to the pandemic era,” says a finance professor.

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For the past several years, business at Oveja Negra in Salida has grown a healthy 15-20% a year. In 2020, Lane and Monty Willson said sales of their custom-designed bike bags tripled. And all those orders from bikepackers were made online. 

“We are so, so lucky to be in this position, but there are major challenges that could take us down in the coming years and yeah, that still keeps me up at night,” said Lane Willson. 

She lost veteran workers and hired a new team. But then pandemic stresses led seven new-hires to leave — after the Willsons spent tens of thousands of dollars training them. New buyers flocking to bikepacking are ready to spend big at Oveja Negra, but they want a level of customer service that has pushed Willson to quadruple her on-the-phone sales workforce.

“We love helping people. We just don’t have enough manpower to make bags and help everybody,” Willson said. “Is that type of buying going to change? Is this online trend going to stay? It’s unsettling to be hiring and making decisions in this shifting environment.”

TODAY’S UNDERWRITER

Online shopping exploded in the last year as home-bound shoppers nested during the pandemic, spending stimulus money to improve life at home and on toys for outdoor play. The boom has business owners like Willson and lawmakers wondering if the e-commerce shift is permanent and, if so, what does that mean for the future of retail in Colorado? 

Spending by Coloradans shopping from home at “non-store retailers,” like Amazon, added up to $11.54 billion in gross sales in 2020. That’s a 91% increase over the previous year, according to the Colorado Department of Revenue. Sales taxes collected from out-of-state retailers hit $113.83 million in 2020, up 140% from 2019. 

But it’s difficult to credit mouse-clicking shoppers alone for the buoyancy of the state’s sales tax harvest during the pandemic. The U.S. Supreme Court in 2018 opened the floodgates for states to collect taxes on e-commerce, and last year, Colorado started to collect sales taxes from thousands of new out-of-state retailers. 

In the watershed South Dakota v. Wayfair case, the Supreme Court ruled states can demand sales taxes from businesses that do not have a brick-and-mortar shop in their state. The decision overturned previous court rulings and only applied to larger retailers with more than 200 transactions and at least $100,000 in sales. The ruling trickled down to Colorado six months later, when the state adopted a new sales tax collection system. The new rules not only tax online retailers selling to customers in Colorado, but also in-state businesses that previously had to pay only state sales tax but, as of the end of March 2019, must also pay local and regional sales taxes, which vary depending on the buyer’s location.  

Last year the state began reporting sales tax collections from out-of-state retailers adhering to the Wayfair decision. That report shows Colorado collecting $113.8 million from out-of-state retailers in 2020, up from $47.6 million in 2019. 

The Amazon fulfillment center in Thornton opened in June 2018 and spans 855,000 square feet with more than 1,500 employees. (Kathryn Scott, Special to The Colorado Sun)

It’s difficult to break out the impacts of the Wayfair decision from the increase in online shopping in the last year, said Conor Cahill, a spokesman for Colorado Gov. Jared Polis. It’s also difficult to break out sales by Colorado store owners who shifted to online sales during the pandemic. 

It’s even more challenging to tell if traditional brick-and-mortar shops lost business to the surge in online shopping or the pandemic shutdown. One thing lawmakers do know: tax collections and the retail industry in Colorado are not returning to normal anytime soon. 

“We expect more volatility in sales tax collections over the coming months,” said Cahill, pointing to rising unemployment claims and federal stimulus checks replacing lost income and possibly spurring more purchases.

Sales tax receipts could remain volatile

The state expects online sales to remain high after the pandemic’s acceleration of home shopping, he said. But discretionary spending may decline as Coloradans travel, dine and get out after a year of restrictions.

“Once consumers are confident in resuming previous activities that require in-person contact, spending on services will increase, likely reducing spending on goods,” Cahill said. 

With the uncertainties and volatility of online sales tax collections, Cahill said state budget planners are not incorporating the rapidly increasing state sales tax collections from home shoppers into upcoming spending plans. 

Most states’ budgets are faring better than worst-case-scenario projections floated by lawmakers last spring. Many states actually did better in 2020 than 2019, with budget surpluses at the end of the pandemic year. A study by Pew Charitable Trusts released last week showed 28 states reporting lower revenues from April through December 2020 compared with the same period in 2019. But revenue was flat or up in 22 states. The mix of suffering and thriving states is challenging federal lawmakers as they craft the latest round of COVID-relief funding.

Across Colorado, the budget crises from the pandemic shutdown have not been as bad as expected. Municipalities slashed budgets in March and April, anticipating a widespread slowdown in spending and economic activity. But the economic collapse triggered by a retail shutdown never happened.

Last year, the Colorado Department of Revenue collected state sales tax from 64 counties on $110.43 billion in taxable sales. That’s down less than 1% from the previous year and up more than 6% from 2018. But again, it’s difficult to credit the growth in 2020 sales tax collections to just online shoppers. Part of those collections are a result of the Wayfair decision. 

But, as anyone who has waited in line at a rural post office can attest, at least some of that resiliency in retail sales is coming from online shoppers. That’s a national trend.

Challenges for brick-and-mortar ahead 

Last year, mouse-clicking buyers spiked online retail sales by 34% over 2019, according to the NPD Group, which tracks retail sales across the country and researches spending trends. Sales of small appliances, video games, household goods, consumer electronics and toys led the online buying frenzy in 2020, with gains of 50% or more over 2019. 

“We are seeing trends that are not just going to be unique to the pandemic era,” said Mac Clouse, professor of finance at Daniels College of Business at the University of Denver. 

Clouse sees challenges for traditional brick-and-mortar retailers on the horizon. He and his wife didn’t shop much online before the pandemic. Now there’s a box a day on their stoop. They are among the fastest growing segment of online shoppers in the country. The retail-tracking NPD Group recently reported that Americans over the age of 65 are spending $187 a month online, up 60% from 2019.  

“People who have been reluctant to shop online in the past have been forced into it and online sellers have done a very good job at making things less painful,” Clouse said. “They’ve taken away the negative things and now people are saying, ‘Why would I drive to the mall?’ I think traditional brick-and-mortar stores are going to see significantly less walk-through traffic in the future.”

Customers wait their turn in line, many for up to an hour, in the Crested Butte Post Office on Dec. 31, 2018. (Dean Krakel, Special to The Colorado Sun)

Trixie Smith owns three stores in downtown Crested Butte, a hat store, a gift shop and the venerable Pooh’s Corner toy store. 

“I hear people all the time who say they want to buy local, but I see the line at the post office every day,” she said last month as she counted up the day’s receipts amidst a kaleidoscope of toys and games. (Crested Butte doesn’t have home mail delivery, so the line is typically filled with people picking up packages and letters.)

Smith doesn’t sell anything online. All her business is in-person. And she’s had a good year. Locals shopped for Christmas gifts at her stores and visitors — including out-of-towners who resettled in Gunnison County during the pandemic — kept her afloat, she said. 

“I was pleasantly surprised with the amount of business from people who came and visited all summer. There were a lot of families who maybe stayed longer than their typical vacation and they wanted to support local stores,” Smith said. “We definitely were affected by all this but I don’t feel like it’s been horrible, you know. I think this pandemic has made more people think about shopping locally and hopefully that sticks around.”


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