is e-commerce a the threat to main street trade?

["Stephen Cooke" <scooke@uidaho.edu>]

FYI

Steve

>Date: Wed, 06 Oct 1999 15:17:16 -0700
>From: Jaime Snyder <jsnyder@codysbooks.com>
>Organization: Cody's Books
>X-Accept-Language: en
>MIME-Version: 1.0
>To: info@codysbooks.com
>Subject: Message from Andy Ross, owner Cody's Books
>
>WARNING: E-COMMERCE MAY BE DANGEROUS TO THE HEALTH OF YOUR COMMUNITY
>
>"...wherever we find a city district with an exuberant variety and
>plenty in its commerce, we are apt to find that it contains a good many
>other kinds of diversity also, including variety of cultural
>opportunities, variety of scenes, and a great variety in its population
>and other uses."
>- Jane Jacobs, The Death and Life of Great American Cities
>
>
>During the past year, the media has become completely smitten with the
>idea of electronic commerce. In the book business, such retailers as:
>Amazon.com, Borders.com, Barnesandnoble.com Ñ yes, and even
>Codysbooks.com have been experiencing huge growth at a time when the
>book business in aggregate is stagnant.
>Wall Street has engaged in a classic speculative bubble bidding up the
>price of Amazon.com to stratospheric levels, while the business of
>Amazon shows only staggering losses which grow exponentially with every
>quarterly report. Wall Street has even coined a verb, "to amazon", which
>means to float a stock offering generating vast riches based only on
>future hopes rather than on current performance. The speculation in
>Internet stocks, itself driven by the frenzy of day trading, has been
>compared to the tulip craze of the Seventeenth Century; when, at its
>peak, the value of a tulip was greater than the value of a town house.
>The public's response to bookselling on the Web is mixed. Most books
>continue to be sold in physical book stores. But many people like the
>ease of ordering on the Web, which takes precedence over the pleasures
>of taking a book in hand and browsing its pages. They are entertained by
>the clever ways in which Amazon manipulates its database. The hourly
>moving figure of Amazon's best seller numerical rating is a matter of
>much curiosity, even if it fails to make a great deal of sense.
>
>E-COMMERCE AND THE ATTACK ON COMMUNITY
>With all the media madness about Internet commerce, one subject which
>has been neglected is the potential threat that e-commerce poses to
>local communities.
>The Internet industry is incessantly speaking of "community" in its
>advertising and its rhetoric. Certainly the power of the Internet to
>bring people with like interests together who reside in faraway places
>does engender a sort of community. But there is a paradox here which
>needs to be considered and addressed.
>Electronic commerce, with all its talk of community, is in many ways
>corrosive to the interests of real communities. The Internet is, in
>fact, undermining those interests in a myriad of ways. My friends,
>Patrice Wynn and Eric Joost of Gaia Books in Berkeley, recently issued a
>broadside which was really a kind of social balance sheet comparing the
>contributions of their independent store to that of Amazon.com in the
>community. The comparison is eloquent:
>
>1) Number of author readings, and community and cultural events held in
>Berkeley at Gaia since 1987: 1863. Number at Amazon.com: 0.
>
>2) Number of people who have participated in Gaia educational programs
>in Berkeley over the last 12 years: 853,462. Number at Amazon: 0.
>
>3) Number of community organizations for which Gaia has provided free
>publicity and advertising: 12,240. Number at Amazon: 0.
>
>4) Local taxes paid by Gaia to support schools, social services, and
>public agencies: $443,018. Amazon.com: 0.
>
>5) Number of hours donated by owner of Gaia to local and national
>associations to support and strengthen bookselling in America: 8263
>hours. amazon.com: 0.
>
>The proper metaphor for e-commerce is that of colonialism. E-commerce
>exploits local markets by taking resources out of the community without
>returning anything in kind. Local communities ought to be concerned
>about this. They ought to be fighting for their local independent
>businesses who are working to bring economic and cultural enrichment to
>their communities, who are bearing the burden of sales tax and property
>tax collection and are creating exciting and lively main streets which
>make communities fun and interesting.
>THE ECLIPSE OF MAIN STREET
>During the last 20 years, chain store domination of local economies has
>attenuated the health of main streets and city centers. For most of this
>century, the dominant retail model was one in which large and small
>stores existed in a symbiotic relationship with one another. A new
>department store in town was not a threat to a smaller independent
>business but was an asset, a means of attracting more customers. The
>business plan of a new department store was not to crush smaller
>businesses but to feed off of them in a lively and diverse shopping
>district.
>The creation of shopping malls beginning in the 1950's was very damaging
>to downtown districts and opened the way for the formulaic retail models
>which dominate American business today. However the new model was still
>based on the idea of symbiosis. The "anchor" department store tenants
>contributed and benefited from the diverse smaller tenants in the
>shopping centers and vice versa.
>This model changed dramatically in the 80Õs with the rise of the "big
>box" stores. The so-called "Walmartization of America" created an
>entirely new retail ethos. Walmarts originated in small towns in the
>south and have proliferated. Walmart generally opens huge freestanding
>warehouselike buildings
>surrounded by parking lots outside of town. Its goal is not so much to
>feed off  and feed into indigenous community-based businesses but rather
>to crush them, to be the only retail destination in town. Wherever
>Walmarts have opened up in small communities, they have left a legacy of
>destroyed local businesses, unsightly sprawl and boarded up main
>streets.
>Big box stores frequently demand tax abatements from communities in
>exchange for the promise of big sales tax windfalls and increased local
>employment. Additionally there always exists the explicit or implicit
>threat that if the community does not agree to the superstore's terms,
>the store will open in a neighboring community and drain taxes away.
>This phenomenon is apparent in Emeryville, a small development-oriented
>community near Berkeley, which has aggressively attracted huge big box
>stores and is draining sales tax dollars away from neighboring Berkeley
>and Oakland. The competition between communities for these "sales tax
>generators" engenders a beggar your neighbor mentality which pits
>neighboring communities against one another in the struggle for tax
>dollars.
>A recent study by Dr. Kenneth Stone of Iowa State University showed that
>the effect of major discount chains on regional economies was a
>negative. They rarely create new business. Instead, they drain business
>away from local merchants. Studies have shown that in these situations,
>three jobs are lost for every two that are created.
>Other "big box" retailers, such as Kmart, Target, Toys R Us, Home Depot
>and Barnes & Noble, have followed the Walmart example. These new
>enterprises are called "category killers" by the investment community.
>The name is significant, because it brings to mind the predatory vision
>that feeds these enterprises. They wish to kill all competition, rather
>than exist along side. They say that they believe in free enterprise.
>But their goal is not to engender a healthy competitive environment, but
>to stifle competition and to completely dominate their market. They have
>succeeded in eviscerating downtowns and local community infrastructures.
>Independent merchants, who have always thrived in main street districts,
>have traditionally done more than sell goods to local shoppers. They
>support the local economies in a myriad of ways: by buying supplies from
>other local stores; employing the services of local lawyers, architects,
>accountants, and plumbers; banking at local banks and employing local
>builders and craftsmen. They contribute non-economic assets to
>communities as well. They chair committees, sit on non-profit boards,
>sponsor little league teams and support PTA's. Like Patrice Wynn of Gaia
>Books (quoted above), local merchants offer free advice and free
>publicity to entrepreneurs and other local organizations. Chain store
>managers are rarely encouraged to engage in local political or community
>affairs. Chain stores generally do not purchase goods from local
>businesses either or engage the services of local professionals.
>INTERNET AND THE EROSION OF COMMUNITY LIFE
>Internet businesses take the colonialism economic model of chain stores
>one step further. At least chain stores collect sales tax, pay property
>taxes, and hire local workers. Internet businesses evade all of these
>activities which are critical to the survival of communities and local
>economies.
>The marketplace has been the center of communal life since the time of
>the Greek agora. The Greeks believed that there could be no meaningful
>life outside of the community or polis. Thus the greatest punishment
>that could be inflicted in ancient Greece was the punishment of
>ostracism, of expelling the citizen from the community.
>Unlike community-based businesses which enrich the life of the
>community, e-commerce encourages isolated, atomistic individuals. It
>creates a tendency to circumvent social contacts, to stay inside, and to
>avoid the experience of social interaction which is so much a part of
>community life. It is no accident that pornography, which thrives on
>loneliness and isolation, has found a  perfect home on the Internet.
>Some years ago, when Cody's first began doing business on-line, we
>believed that the Internet would be a great medium for diversity and
>multiplicity. After all, it doesn't cost much to set up a web-site and
>start doing business worldwide. We were wrong about that. Although it is
>easy to get on the Internet, it is increasingly difficult to get
>recognition on the Internet. E-commerce is even more concentrated and
>monopolistic than the chain stores which dominate commercial life in the
>real world.
>The book businesses which are doing substantial business on the Internet
>are large corporations, heavily funded by Wall Street, which are willing
>to lose hundreds of millions of dollars for the indefinite future. The
>culture of these corporations is the same as the "category killers."
>They seek to crush all competition and are willing to lose whatever
>amount of money it takes to achieve this result. The investment
>community has afforded them resources to absorb ruinous losses for many
>years to come. This is not a model of free enterprise. It is a
>prescription for monopoly power. It is particularly troubling in the
>book business which is the system which disseminates ideas in our
>culture. The end result will be to stifle creativity, diversity,
>multiplicity and innovation.
>THE INTERNET SALES TAX EVASION PROBLEM
>One of the great competitive windfalls that e-commerce has over
>community-based businesses is its ability to avoid the collection of
>sales tax. The problem of sales tax evasion by Internet and mail order
>commerce is becoming a huge national concern. Sales taxes are collected
>by 45 states and are the single largest source of state revenue and the
>second largest source of city revenues (after property taxes). These
>funds are used to build roads, support schools, provide services, all of
>the things which make our communities livable and create orderly markets
>which permit e-commerce to thrive.
>The current law on whether a state can impose a sales tax on an
>out-of-state business doing business in the state is defined by the
>Supreme Court decision of Quill v. North Dakota which was decided in
>1992. It is significant that this case involved a mail order company.
>There is no Supreme Court decision addressing interstate commerce from
>Internet businesses. The Quill case ruled that in order for a state to
>require a company to collect sales taxes for business transactions
>within the state, there must be a substantial physical presence or
>"nexus" within the taxing state.
>Historically mail order operations have not been required to collect
>sales taxes in states where they do not have such presence or "nexus."
>However with the rise of e-commerce, this issue has become of great
>concern to states and communities who justifiably fear a huge loss of
>revenue with the exponential growth of e-commerce which now evades state
>and local sales taxes.
>The federal government has the constitutional authority to create a
>national sales tax on Internet commerce. However Congress appears to be
>as infatuated with the Internet as the media. This year Congress passed
>the Internet Tax Freedom Act. The ostensible purpose of the act was to
>make sure that e-commerce would not be burdened with discriminatory
>taxes that could hinder the growth of this dynamic new medium. However
>this argument was something of a strawman, since no reasonable person
>was advocating such discriminatory taxes.
>Rather it appears that the Internet industry is seeking to gain unfair
>advantage over community-based businesses by delaying imposition of
>sales taxes on e-commerce into the indefinite future. Congress has
>appointed the Advisory Commission on Electronic Commerce to study the
>matter into 2001. The Commission is heavily represented by Internet
>Industry executives and government officials who are very partial to
>Internet interests. The executive director of the Commission is married
>to an Internet industry lobbyist.  Allowing this commission to recommend
>tax policy on e-commerce is like putting the fox in charge of the
>chicken coop.
>We have observed a number of facts in the book business, which lead us
>to believe that book sales on the Internet might legally be subjected to
>sales tax collection without federal enabling legislation. E-commerce is
>much more intrusive than mail order commerce. The proliferation of
>"affiliate" relationships with Amazon.com and Barnesandnoble.com on web
>sites within the various states is a potential basis for "nexus."
>Additionally many Internet retailers implant coding inside their
>customers' computers. These codes are called "cookies" and allow the
>seller to make personalized sales pitches to the customer. Again, these
>"cookies" create the physical presence within the state that would
>permit imposition of sales tax collection.
>The above examples are the basis for an argument for taxing Amazon.com
>(a Washington State corporation) under the existing laws of states which
>have sales tax, although these arguments are by no means definitive. The
>situation with Barnesandnoble.com and Borders.com appears to be a clear
>case of tax evasion. Both Borders and Barnes & Noble have huge physical
>presences in all states throughout the United States. Yet they are not
>collecting sales tax on their web sites. Presumably they are seeking to
>stay competitive with Amazon. Although both Border's and Barnes &
>Noble's Internet sites are separate corporations, they work in tandem
>with their physical stores, cross-promoting one another. Books purchased
>on the Internet are permitted to be returned to the physical stores. A
>clearer case of tax evasion cannot be conceived. Len Riggio, the CEO of
>Barnes & Noble eloquently stated in his annual report of this year the
>interrelated relationship of their physical stores and their Web
>business. He says: "...more and more we view barnesandnoble.com as the
>broadcast channel for the company, and the Barnes & Noble stores as the
>portal through which our e-commerce business will be nourished."
>One would have to conclude that these companies are consciously seeking
>to avoid their corporate responsibilities and continue their
>colonialistic exploitations of local communities. Amazon recently built
>a warehouse to service its largest market which is the State of
>California. Where did they construct the warehouse? Nevada, a state
>which does not collect sales tax, thus permitting Amazon.com to continue
>evading sales tax collection in California. Thus Amazon receives an 8%
>windfall over community-based businesses, it avoids making its
>reasonable contributions to the state and communities, and offers a
>regressive tax break to the (mostly) affluent customers at its site on
>the Web.
>The great Supreme Court Justice John Marshall has stated that the power
>to tax implies the power to destroy. This is certainly the case when one
>class of business must collect substantial taxes for selling the same
>products to the same people as another protected class. The Internet
>industry has been saying that they need to be protected to allow them to
>thrive and develop. But this is nonsense. The Internet industry has been
>growing because of a trillion dollar investment windfall from Wall
>Street, which has permitted companies like Amazon.com to lose hundreds
>of millions of dollars every year and continue to do so for the
>indefinite future. There is no compelling policy reason for Congress and
>the states to favor these wealthy and well-financed corporations and
>their equally wealthy customers at the expense of other businesses and
>other consumers. Community-based businesses and the communities which
>they serve are now endangered by the unfair and ill-conceived
>distortions from the tax breaks for e-commerce by a country emotionally
>caught up with all things Internet.
>Ultimately I believe there will be a national sales tax on Internet
>commerce.   This must occur because America believes in fairness. But
>action must be taken soon to level the playing field, so that
>community-based businesses can continue to exist and play their vital
>role in the ecology of communities.
>If you desire to purchase your books on-line, as many of you do, I urge
>you to consider Booksense.com; a website for purchasing books which has
>been created by the American Booksellers Association and will be going
>live in November. This website is really a consortium of independent
>community-based booksellers, who wish to offer their services to those
>who shop on-line.  Booksense.com is committed to the values of
>multiplicity and diversity which we are advocating. By buying from
>Booksense.com, you will be supporting these values.
>The Internet industry likes to talk about "revolution" and uses the
>traditional language of the political left to describe the changes it is
>making to the way America does business. The images which it employs are
>invariably hip and filled with iconoclastic visual references to the
>youth culture.
>In fact the reality of electronic commerce is quite different. Its
>growth is driven by values which are more associated with the political
>right, or perhaps the corporate ethos of Walmart: the fetish of
>commodities, the primacy of Wall Street, the desire for monopoly power
>and the indifference to diversity and community values.
>We are not Luddites. We know that the Internet is here to stay. Most of
>the research for this piece was done on the Internet and you may be
>reading it on a website. Yet many of the ideas offered here - like most
>of the community values we take for granted - are in danger of being
>lost with all the Internet madness of our culture. If you cherish
>multiplicity and diversity, if you abhor monopoly power and one
>dimensional culture, if you enjoy the simple pleasures of interacting
>with your fellow book lovers instead of a screen, support your
>neighborhood bookstore and please, if at all possible, buy local.
>
>Andy Ross, Owner of Cody's Books, Inc.
>aross@codysbooks.com
>