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Minnesota 2020 Journal: Bettering Best Buy

August 17, 2012 By John R. Van Hecke, Executive Director & Fellow

Minnesota needs Best Buy. This might be the last thing you’d expect from a progressive policy advocate but Minnesota needs a healthy, successful Best Buy. We’re a stronger, better state with Best Buy than we would be without it. We can’t “save” Best Buy with the conventional policy tools routinely deployed to stimulate business growth but the company’s situation strongly points to overdue structural consumption tax changes.

Best Buy is an electronics retailer. It’s in trouble. Wall Street analysts express doubt about the company’s long-term growth prospects. The retail landscape has changed dramatically. Will, analysts wonder, Best Buy be able to adapt?

Before I go any further, let’s get the naked Minnesota self-interest piece out of the way. Best Buy is headquartered in the Twin Cities. Around 5,000 people work at the corporate campus, part of Best Buy’s 160,000+ workforce. If Best Buy collapses, those jobs disappear. Headquarters jobs tend to pay much better than retail store jobs so Minnesota would particularly feel that loss.

The community impact alone makes Best Buy’s health a state concern. We will be much better off retaining rather than losing Best Buy.

Twenty-five years ago, under very different economic circumstances, Target Corporation, then known as Dayton-Hudson Corporation, was the subject of an attempted hostile corporate takeover by Dart Group of Maryland. Crying “Save the Daisy Sale,” Minnesota state elected officials convened a special legislative session. In less than a day, legislators enacted and Governor Perpich signed an anti-takeover law allowing Minnesota company boards of directors to consider stakeholder interests, not just stockholder interests, in evaluating stock purchase offers.

The new statute helped create an additional barrier to rapid takeover. With the October 1987 stock market crash dramatically altering market conditions, Dart backed off.

Best Buy faces a very different situation. Where Dayton-Hudson was viewed as an undervalued company, Best Buy’s circumstances are reversed. While it still competes with Target and Walmart, one of its chief rivals is now Amazon, the on-line retailer. Best Buy competes with any and every on-line retailer but Amazon is the largest, clearest competitor.

Both organizations have sophisticated sourcing, warehousing and distribution operations. Both can quickly move product in and out. Best Buy pays a premium rent for all of those big box retail operations. Amazon does not.

Consumer purchasing behavior is changing. Big box stores now compete for disposable income with on-line shopping. The notable exception would be high cost, high margin electronics like Apple’s iPhone, still successfully sold in boutique retail settings. But, that’s the exception, not the rule. Retail spending reflects rather than leads the economy. Consequently, the slow growth pattern will continue to inform the retail industry.

Best Buy, through its big box retail strategy, does one publicly important thing on-line retailers operating in mosts states do not. Best Buy collects state sales tax. Amazon, like every on-line retailer, gets a free pass in most states when it comes to turning that money over to locals for infrastructure maintenance and recapitalization. On-line retailers use the same highways, airports, bridges, docks, courts, public safety and public health services as bricks-and-mortar retailers. The on-line folks aren’t, however, required to collect point-of-sale taxes in most states.

Here’s the important distinction. Retailers don’t pay sales tax; they only collect it. In most circumstances, the purchaser is responsible to pay the sales tax in the sale's jurisdiction. In other words, when you just have to have a vintage Stretch Armstrong sold on eBay from a guy in Downey, California, you, the buyer, are responsible to pay Minnesota something called a user tax. The seller, because the buyer lives in another state, has no obligation to collect and forward the sales tax.

When it’s a few transactions, this lost revenue isn’t worth the collection system’s cost. Amazon sales volume represents billions of transactions. Suddenly, the sales tax collection obligation is no longer an academic problem. As sales shift to on-line retailers, state sales tax collections decline.

Minnesota, like most states, relies on a mix of income, property and consumption taxes to pay for public infrastructure and services. Dialing back receipts from one source increases dependence on the others. If the on-line purchasing trend continues, other taxes are going to rise to off-set the sales tax collection’s decline. The three-legged stool of public revenue support is increasingly off-balance. Keep that in mind, at least in part, as your property taxes keep climbing.

Minnesota needs Best Buy to succeed. We really do. Its success reflects our state’s strengths. Minnesota also needs to partner with the other 49 states, reforming sales tax collection. That will create a level marketplace playing field. Then, everyone benefits, not just a few.

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