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After sales tax ruling, some call for reining in offshore vendors

Published June 25, 2018
U.S. consumers can often buy from non-U.S. sites without paying sales taxes or import duties. Sometimes that gives foreign retailers a head start of 20 percent or more.

WASHINGTON (BRAIN) — Brick-and-mortar retailers consistently rank competition from online vendors as one of the biggest challenges facing their businesses. Many cheered last week's U.S. Supreme Court decision in South Dakota v. Wayfair allowing states to begin collecting sales tax from e-commerce companies, even if the online retailers don't have a physical presence in the state.

But industry observers note that foreign e-commerce vendors still have several advantages over U.S. retailers, on and offline. The Supreme Court ruling, in fact, generally increases the advantage of offshore e-commerce companies over U.S.-based businesses.

Between sales taxes and import duties, offshore e-commerce brands sometimes have a head start of as much as 21 percent over U.S. retailers.

Currently, foreign companies only collect state sales taxes in states where the company has a "nexus" — generally defined as a physical presence, like an office or warehouse, or a payroll. It's too early to say how the Wayfair decision will be interpreted by the states or if Congress will pass legislation creating and regulating the state tax system, but currently it's likely that if a non-U. S. company has nexus in the U.S., it could be required to collect state taxes from customers in all states, the same as a U.S.-owned business.

But most offshore vendors don't have a U.S. nexus. And exemption from state taxes isn't the only advantage they enjoy.

In 2016, U.S. Customs stopped imposing duties on imports valued at less than $800. The so-called "de minimus" limit was previously $200. Retailers and consumers have noted that even on orders valued above $800, some offshore companies will mislabel packages and divide up orders to get around duty collection. Shipping wheels separately from the rest of a bike can bring the value of at least one of the packages below $800, for example. And wheels, parts and frames are subject to smaller duties than complete bikes, as well.

Import duties on bikes, parts and related accessories and tools range from 0 to 11 percent (see attached pdf for some examples).

The $800 minimum is particularly galling to some because it is the highest among major countries. Canada's de minimus is just 20 Canadian dollars ($15), for example. The United Kingdom's is 150 euros ($175).

Now that the Supreme Court has (almost) resolved the state tax issue, the time might be right to push to lower the $800 minimum and to increase enforcement, said Alan Goldsmith, the former owner of Supergo, a Southern California retail chain and mail-order business. Goldsmith sold Supergo to Performance in 2002.

"With the sales tax out of the way, maybe it will liberate people to start moving on this other issue," Goldsmith told BRAIN.

Goldsmith, who is a lawyer, has discussed the situation with U.S.-based e-commerce companies for years. But so far none of them has been interested in challenging their foreign competition with a lawsuit or pushing their representatives for changes.

"I am not aware of any major U.S. bike e-commerce operations that seriously lobbied their congressional representatives for relief," he said. "It's well established that the most persuasive impression comes from constituents that explain damage occurring in the congressman's own district.

"This battle isn't over. Bike e-commerce companies such as Jenson, Competitive Cyclist, Performance, and others need to lobby their U.S. representatives to rectify two ongoing outrageous conditions that are ruining the U.S. pro shop business: First is the fairly new $800 duty-free cap on bike gear imports. Second is the dismal lack of enforcement by the USPS and other carriers to collect duty on imports that exceed $800."

The current $800 de minimus results from the Trade Facilitation and Trade Enforcement Act of 2015, signed by President Obama in early 2016. President Trump could ask Congress to modify the law in the name of leveling the international playing field.

"If anyone would do anything about it, it would be him, if someone could get it on his radar," Goldsmith said.

The de minimus was increased in the name of freeing up Customs and Border Patrol to focus on larger shipments and security issues. It was also seen as a boon for consumers.

If duties were collected on consumer orders, they would be calculated on a retail value of the product, while U.S. importers are currently paying duty on the wholesale import value. So collecting the duty on retail sales would go that much farther toward making U.S. wholesalers and retailers competitive with the foreign competition.

Lowering the de minimus would give the industry another tool to battle counterfeiters, because shippers are not required to submit entry data through CBP’s automated portal when importing shipments of less than $800, noted Pat Cunnane, the CEO of ASE, the parent company of Performance and of ASI, which owns Fuji and other brands.

"There is so much counterfeited goods coming through direct-to-consumer commerce that we are taking a double hit. This stuff ends up in the market and then it's very difficult to trace it," he said. 

European-based vendors, in particular, have not been shy about promoting the $800 limit to their U.S. customers.

Chain Reaction, one of the best-known U.K. e-commerce companies, currently is paying the duty on complete bikes it sells to U.S. consumers, but it warns U.S. customers that they are responsible for other products in orders totaling more than $800. On its website, the company also notes that U.S. customers do not have to pay state or local taxes on orders from the company. 

Wiggle, which merged with Chain Reaction in 2016 and continues to operate its own e-commerce site, makes similar promises to its U.S. customers. Wiggle's site notes that "Customs and Border Protection (CBP) declarations are made available to state tax representatives that may claim state taxes from yourself."

According to the U.S. Customs and Border Protection office, some states occasionally review these declarations and send letters to importers and travelers notifying them that they owe state taxes.

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