PhillyDeals: Pep Boys joins tax-free world of online sales

Even the garage is going online.

Pep Boys, the Philadelphia-based car-parts retail chain, will make its whole stock of auto parts available online, direct to your home or neighborhood store, after Jan. 1, chief executive officer Michael Odell told a packed house at the Association for Corporate Growth's monthly meeting in Center City last week.

"We have to have it," Odell told me. "Or else, look what happened to Borders," the bookstore chain wiped out by online competition.

Pep Boys already began selling tires and scheduling tire service through its 600-plus stores online on a test basis, through its TreadSmart program, in July. The next step will be to apply that to all goods, Odell said.

Pep Boys would rather you come in the store and hire them to install your parts. But the company also has to take into account many consumers' fast-growing preference for online sales - and the fact that online customers typically do not pay state taxes.

In fact, since the birth of the Internet, U.S. tax policy has favored online sales at the expense of brick-and-mortar stores.

A 1992 Supreme Court decision made it hard for states to force online retailers to collect existing sales taxes. Lately, states have written creative policies to boost online tax collections. The economic slump has combined with rising smartphone-based sales to hurt Main Street and mall stores. Merchants are complaining that untaxed online competition is unfair.

But Amazon.com, the biggest online retailer, has used its clout as a growing employer to extract hands-off tax policies from state governments, who worry Amazon will take its warehouses and the jobs they create to another state.

"Amazon's online sales tax strategy" includes setting up legal subsidiaries in states such as Delaware that do not impose sales taxes and also "using its investment and job-creation clout to cut deals with specific states," Shawn Milne, analyst at Janney Montgomery Scott L.L.C., wrote in a report earlier this summer.

Amazon has used jobs as a bargaining chip in extracting tax concessions from Texas, California, South Carolina, and other states in the last year, Milne said.

With one in six Americans unemployed or working just part time, state governments are even more allergic to job losses than they are to budget cuts, which always result from falling tax collections.

Amazon did not return calls seeking comment on its state sales tax and employment deals.

Pennsylvania, home to at least four Amazon facilities in the warehouse belt that runs in an arc north and west of the Philadelphia suburbs, hasn't cut a special deal with the company, state Revenue Department spokeswoman Elizabeth Brassell told me.

That may be because Pennsylvania hasn't pressed online retailers as hard as some other states.

Pennsylvania requires all companies with "physical presence" in the state to collect sales taxes and pass them along to state officials, but it uses voluntary means - what Brassell called "an outreach program that educates businesses" and a self-reporting line on state tax forms - to encourage compliance.

How's that working? "The department estimates we will lose $345 million" in unpaid Internet purchase taxes during 2011, she said.

But there are signs this climate might be changing. In a tentative deal with California earlier this month, Amazon agreed not to push for a threatened voter referendum on online-retail taxes, in exchange for a one-year delay in an online collection law.

"It's shocking," because, until now, "Amazon used jobs like a weapon," establishing warehouses in states that agreed not to tax and cutting business ties to firms in high-tax areas, said Fiona Dias, chief strategy officer at ShopRunner L.L.C., a Conshohocken-based online sales service that competes with Amazon.

"They sense the tide of public opinion is turning," and more people now consider the de facto exemption to the Internet tax unfair, she added.

Some retailer groups say the California deal is a sign Amazon and other online stores are conceding they might have to collect state tax payments in the future, says Pep Boys general counsel Brian Zuckerman.

But retailers also say state-by-state arrangements are a poor substitute for a single, national sales tax policy. That policy would most likely require an act of Congress.

What are the chances of that? As the U.S. Senate prepares to overhaul federal tax policy, Sen. Richard Durbin (D., Ill.) and other lawmakers on the relevant committees believe the time might be right for a national bill, according to Dias.

But she's not convinced it will happen, even with the Amazon deal.

"Every state has a fiendishly ridiculous set of reasons why they want to tax candy or apparel or tires," she said. "A lot of states would have to agree for [state sales taxes] to go away."