The Boston Globe reported on November 21, 2012 that the Patrick adminstration is pushing for Amazon.com to collect sales tax in light of their growing physical presence in Massachusetts. Currently, online retailers such as Amazon are exempt from collecting the 6.25% Massachusetts sales tax.
Josh Bowman takes a more in depth look at "Marketplace Fairness" in this blog post, specifically addressing the U.S. Supreme Court ruling in Quill Corporation v. North Dakota and what it means for online retailers.
Do you think Amazon.com should have to collect sales tax? Share your thoughts with us!
Written by: Paula G. Curry
While shopping for socks the other day, I heard this announcement. “Did you know,” said the soothing female voice, “that this Kohl’s store is LEED Certified?” Frankly, I had no idea, but obviously it was something that Kohl’s wanted me to know. That got me thinking. Which other retailers are embracing LEED? Does LEED certification of a store make consumers feel better about shopping there? What about other “green” practices and their effect on sales?
A quick web search told me that many of the places where I shop regularly are either LEED certified or are embracing green technology and practices. Stop & Shop is purchasing renewable energy credits and installing solar panels on some of its stores, and was ranked among EPA’s Top 20 retail partners in its Green Power Partnership list for 2012. Home Depot reduced its energy use by 16% from 2004 to 2010, with the goal of reducing it by a total of 20% before the end of 2015. Target’s 2011 Corporate Responsibility Report touts the chain’s commitment to reducing greenhouse gas emissions, improving recycling, and saving water. Target is also expanding into Canada, and will seek LEED certification for all of its stores there. Staples, Whole Foods, and Starbucks were names I frequently came across when browsing lists of retailers that are focusing on sustainability. Who knew I’d been shopping green all this time.
Other retailers are using green practices to attract customers and enhance sales. Some, such as REI, Patagonia, and Timberland, sell products that feature recycled content or sustainable fabric and materials, while others, like Best Buy, get customers in the door by offering them a way to get rid of unwanted household electronics. (I have taken advantage of Best Buy’s recycling program, and have never left the store empty handed). Still others are “greening up” at least in part to improve their images and to stay off the radar of environmental groups.
Personally, I don’t think much about a store’s carbon footprint, but apparently a significant number of consumers do. In a recent survey, 54% of grocery shoppers said they base their buying decisions at least in part on sustainability considerations. There are also a growing number of companies and organizations, such as GoodGuide, the Sustainable Furnishings Council, and Green America, that are helping people make environmentally-friendly buying decisions.
So . . . how green IS my Dollar Tree? According to Newsweek, the chain ranked 40th among top retailers in 2012.
Does shopping in a green building matter to you? Comment and share your thoughts with us!
Written By: Jane Thomassen
In exchange for creating a retail environment that increases the revenues of a tenant’s store, a landlord often negotiates for “percentage rent” in addition to the fixed rent due under a lease. “Percentage Rent” is the tenant’s payment of a percentage of its gross sales from the premises over and above a specified annual dollar amount or breakpoint. While the percentage rental rate and breakpoint will vary depending on the type of business being operated by the tenant, the amount of fixed minimum rent will take the percentage rent formula into consideration.
The amount of actual percentage rent payable depends upon the tenant's financial success at the premises. Therefore, a tenant under a percentage rent lease should be required to make all efforts to maximize gross sales at the store. Additionally, the lease should include tenant reporting requirements and landlord audit rights to ensure the accuracy of the reported gross sales.
In order to realize the benefits of a percentage rent lease, landlords should include the following lease provisions:
1. Retail Restriction Limit. During the term, the tenant shall not engage in any business within a certain geographical radius of the premises similar to or in competition with the tenant's operations at the premises. The distance of the radius will depend on the location of the premises. For example, the radius may only be a few blocks in an urban location and several miles in a suburban location. If the tenant violates this provision, the gross sales from the violating store should be included in the tenant’s gross sales.
2. Continuous Operation by Tenant. Tenant shall operate 100% of the premises during the term with due diligence and efficiency to produce the maximum amount of gross sales. Minimum hours of operation should also be required. In the event the tenant is not open for business during the days and hours required under the lease, the percentage rent breakpoint should be proportionately reduced or tenant should be required to pay 150% of fixed rent for each day that it is not open, which increased amount shall be deemed to be in lieu of percentage rent.
3. Definition of Gross Sales. The definition of “gross sales” should include all sales by the tenant and any sub-tenants from the premises, whether by mail, telephone, or on-line. Exclusions from gross sales should be limited. Standard exclusions include returns and refunds upon transactions included in gross sales, the amount of actual fees paid to credit card companies and taxes paid to the taxing authority. A frequently negotiated item is whether sales of gift certificates are included in gross sales upon sale or redemption thereof.
4. Records and Statements. Tenant should be required to prepare and keep at the premises adequate books and record showing gross sales for each month during the term of the lease and report gross sales to landlord on a monthly and annual basis. The annual gross sales statement should be certified by an executive officer of the tenant or be an audited statement prepared by an independent certified public accountant.
5. Audit Rights. Landlord should have the right to audit the tenant’s records of gross sales. If landlord's audit shall disclose an understatement in gross sales for such period of three percent (3%) or more, then the tenant should be required to immediately pay landlord any percentage rent due on such deficiency together with interest and the cost of such audit.
These types of landlord oriented provisions will give the landlord the rights and remedies necessary to maximize percentage rent.
Written by: Joshua M. Bowman
Given the amount of media attention that the issue of “Marketplace Fairness” (formerly called Main Street Fairness) has attracted from Massachusetts media outlets (See recent articles published by Boston Globe, Boston Herald) I wanted to take this opportunity to explain what “Marketplace Fairness” is, and why it is an important issue. In the interest of full disclosure, I am a member of the Massachusetts International Council of Shopping Centers (ICSC) Government Relations Committee, which is a strong advocate for Marketplace Fairness. However, this blog entry expresses only my personal viewpoints and opinions, which may differ from the viewpoints and opinions of ICSC and/or Sherin and Lodgen LLP.
Marketplace Fairness refers to the movement for legislation to require remote (i.e., out of state) internet retailers to collect state sales tax in connection with sales made over the internet. The movement involves the prospective passage of federal legislation (such as H.R. 3179: Marketplace Equity Act of 2011 or s. 1832: Marketplace Fairness Act) and state legislation (such as, in Massachusetts, Massachusetts House Bill 3673). The need for such legislation can be traced back twenty years to the 1992 U.S. Supreme Court ruling in Quill Corporation v. North Dakota, where the Court ruled that remote internet and catalog retailers are exempt from laws requiring them to collect local or state sales taxes unless such retailers have a “nexus” in the state where the purchaser is located. What constitutes a “nexus” is a complicated legal determination, although, generally speaking, a “nexus” is usually found to exist in situations where a given online retailer has a substantial physical presence, such as a store or warehouse, in the buyer’s state. While the ruling affects both internet and catalog retailers, due to the dramatic increase in internet sales over the past 20 years, the focus of the movement is primarily on internet sales. Advocates for Marketplace Fairness include ICSC, the Retailers Association of Massachusetts and the Main Street Fairness Coalition.
In Quill Corporation v. North Dakota, the Court found that requiring remote online retailers to collect state sales taxes created an unconstitutional burden, given the complexity and uniqueness of each state’s taxation system. The exemption created by Quill Corporation v. North Dakota specifically relates to collection, not to the imposition of sales or use tax. Thus, while few states have attempted to collect from consumers, state tax technically remains due on remote internet purchases where tax is not collected at the time of sale, and the burden to remit such taxes falls on the individual consumer. In the decision, the Court noted that “Congress may be better qualified to resolve [the problem].” However, in the 20 years since the ruling, Congress has failed to enact legislation that would require remote online retailers to collect state sales tax. This has remained true despite the fact that many large internet retailers, such as Amazon, have actually supported such legislation, stating that “Amazon.com has long supported a simple nationwide system of state and local sales tax collection, evenhandedly applied to all sellers, no matter their business model, location or level of remote sale.”
To address the Court’s concern in Quill Corporation v. North Dakota about the unconstitutional burden of requiring online retailers to navigate the numerous, complex and diverse state sales tax systems, a simplified and uniform system has been proposed to assist with the easy administration and collection of sales and use tax for online purchases. One version of this system is called the Streamlined Sales and Use Tax Agreement (SSUTA). To date, 24 states have adopted the simplified, uniform sales tax system created by SSUTA, and many other states have indicated that they will do so if Congress passes legislation making the SSUTA the preferred solution. In Massachusetts, for example, House Bill 3673 is presently pending in the Massachusetts legislature which, if enacted, will lead to the adoption of the SSUTA in Massachusetts. However, because Marketplace Fairness involves interstate commerce, Congressional authorization is still needed in order for a state to require remote interstate retailers to collect sales tax for the online sale of goods to a resident of a given state.
Advocates of Marketplace Fairness often point out that the exemption created by Quill Corporation v. North Dakota has effectively created a subsidy system for internet retailers, which is unfair to retailers who do not derive substantial revenue from internet sales (often called “brick-and-mortar retailers”). One of the most dramatic examples of this unfairness is illustrated in the book seller sector, where online retailers such as Amazon have thrived, while brick-and-mortar book sellers like Borders have gone out of business. As a group, online retailers continually show double digit annual revenue growth, while brick-and-mortar retailers, many of whom are leaders in their respective local communities, continue to struggle. It is also estimated that between $21.5 and 33.7 billion in nationwide state sales tax revenue is lost each year as a result of the exemption – with such losses occurring at a time when many states are facing some of the largest budget deficits in history. Some also fear a “multiplier effect” if states attempt to mitigate budget shortfalls by further taxing brick-and-mortar retailers. Advocates for Marketplace Fairness also note that in 1992, when Quill Corporation v. North Dakota was decided, the e-commerce industry was in its infancy. Now, 20 years later, the industry has evolved to the point where it could handle the burden of collecting sales tax on purchases for different states, especially since pending legislation will likely create a uniform, simplified sales tax system.
Opponents of Marketplace Fairness view the elimination of the exemption created by Quill Corporation v. North Dakota as a de facto tax increase, which should be opposed on economic as well as ideological grounds. Opponents also believe that the elimination of the exemption would unfairly affect home businesses and e-commerce businesses with only a few physical stores in a given state. Opponents have stated that federal legislation would require online retailers to purchase costly new computer software to keep track of the different state taxation systems, and opponents see the elimination of the exemption as an unwanted government expansion into the private sector. Opponents have also claimed that it is unfair to require online merchants to deal with the tax regulations of all 50 states, while local brick and mortar retailers are usually only required to keep track of the tax system in effect in the state where they are located. Opponents have also claimed that brick-and-mortar retailers receive a disproportionate benefit from the payment of sales taxes, since their customers use the services supported by such tax dollars (such as state and local roads) to access stores. While I won’t attempt here to rebut all of the opposition’s concerns, I will note that the two bills pending in Congress simplify the process to collect and remit sales tax by a remote seller and set exemptions for small retailers.
Before closing, I will note that the conversation about Marketplace Fairness in Massachusetts has recently been affected by Amazon’s decision to open an office in Cambridge and purchase the robot company Kiva Systems in North Reading. It has not yet been determined whether Amazon’s actions are sufficient to create the “nexus” described by the Court in Quill Corporation v. North Dakota, which would require Amazon to collect sales tax on all internet sales involving purchasers in Massachusetts. While such issue is being resolved, and presumably thereafter, proponents for Marketplace Fairness will continue to advocate for the passage of federal legislation and state legislation that will lead to a uniform requirement that all internet retailers collect state sales tax for internet sales, regardless of whether or not the retailer has an actual bricks and mortar location in the state.
More information on Marketplace Fairness can be found at the website of the Main Street Fairness Coalition and at ICSC’s website on this issue.
Written by: Jane Thomassen
Retail tenants entering into long term leases should be aware that tenants’ rights to assign or sublet may prove illusory if other lease provisions effectively prevent transferring the lease to a third party. Here are several lease provisions that should be analyzed to ensure that a prospective transferee has the flexibility to operate its business and be willing to assume the lease:
- Use. The use clause must be broad enough to allow transfers for a different retail use. If the use clause states that the premises may only be used for the original tenant’s particular use “and for no other use or purpose,” the original tenant be precluded from assigning or subletting to a different type of business. Most favorable for the tenant would be for the lease to provide that the premises may be used for the initial use and “ any other lawful use” or “any other lawful retail or commercial use” that does not conflict with any exclusive use then in effect granted to another tenant in the Shopping Center. A compromise would require landlord’s reasonable consent to a change in use.
- Trade Name. Tenants should be wary of agreeing to operate under a specific trade name. If tenant agrees to conduct business under a specific trade name, it should negotiate the right to change the trade name without landlord’s consent. Alternatively, the lease may provide that changes to the name may be approved by landlord, such approval not to be unreasonably withheld, conditioned, or delayed.
- Alterations. If the lease requires landlord’s consent in its sole discretion for all alterations, a transferee may not be able to redesign/refixture the store. Interior, non-structural alterations after the initial build-out should be allowed without the necessity of landlord’s consent. Material alterations (such as exterior alterations, or those that affect the structure, or materially affect building systems) will usually require the landlord’s consent, but such consent should not be unreasonably withheld, conditioned, or delayed.
- Signage. Transferees will need the right to change exterior signage. If the lease requires landlord’s consent in its sole and absolute discretion for changes in exterior signage, a new tenant may be prohibited from erecting its signage. The lease should provide that landlord’s consent to changes in exterior signage shall not be unreasonably withheld, conditioned, or delayed. Furthermore, tenants should seek to limit landlord’s approval rights to proposed changes to tenant’s exterior signs which are consistent with tenant’s current or future prototypical building signs, or those of a successor regional or national retailer’s prototypical building signs.
- Operating Covenant. If the lease requires continuous operation (i.e., no right to go dark), an exception should be carved out for reasonable time periods for transfers and the build outs required before a successor tenant opens for business.
- Certain Tenant Rights only applying to the Original Tenant. The lease may provide that certain rights granted under the lease are only applicable to the original tenant. Therefore, any transferee will not be entitled to such rights. For example, the lease may provide that the tenant’s right to offset rent in the event of self-help is limited to the original tenant. Try to limit these types of restrictions or carve out an exception for subtenants of a certain minimum net worth.