Category: It’s Only Gonna Get Worse

Marketplace Fairness (???) Act, or Lets Stomp on Small Businesses Again


ImagesCA3IO0HMBelieve it or not, but the Battle for (or against, if you will) the Internet Sales Tax has been going on for 20 years now. 

First, there were no online sales taxes at all.  Back in the early 90s, members of various legislative bodies thought that the World Wide Web was something that Al Gore invented and, therefore, didn't pay much attention to it, especially the Republicans.  Meanwhile, the online vendors (the term e-tailer didn't gain wide acceptance until 2000) and their customers justifiably acted like pioneers in the brave new world:  as far as they were concerned, they operated in the environment with no physical attributes, and no brick-and-mortar regulations were applicable to them. 

It didn't take too long, however, for the states to catch on and get all itchy on account of the missing revenues.  The first most obvious targets were those conventional retailers, who quickly added shopping carts to their websites: Godiva, Staples, Best Buy, Bloomingdale's, etc.  With them it was easy to enforce the guiding principle of sales taxation - the physical presence rule.  They have multiple locations practically in all states – collecting and remitting sales taxes are routine tasks for them.  A bit of code-writing and, voila, if your shipping address is in the state where the seller has a store, an office, or a warehouse, the tax will be applied.  

I was in the avant garde of the e-commerce consumers.  I bought my first book on Amazon in 1995.  I recall it was a new addition of Joy of Cooking: 1150 pages – too bulky to drag it with me from B&N.  A desire to own a one-of-a-kind Victorian coral bracelet sold by an antique dealer in Amsterdam trampled my inherent mistrust and led me to the conclusion of my first eBay purchase in 1996.  I had to fax my credit card info to the seller – we were still two years away from the inception of PayPal. And that same year I booked a room at Montreal's Ritz Carlton through Expedia.  I consider myself an Internet veteran.  Today, 90% of my consumer experience is managed online.  And I am not alone: in 2012 Internet sales amounted $226 billion.

And all these years, I've been kind of on the fence about this whole Internet taxation issue. On one hand, I LOVED not paying sales taxes for the items I bought from my home.  Plus, no state or city resources were utilized: I didn't use any public transportation, roads, or street parking; I didn't walk into any buildings; nor did I use any City utilities. The cost of my connectivity is taxed via my cable and power providers, while delivery services collect sales taxes from the shippers. I still remember how disappointed I was when Amazon opened a distribution center in NYC to facilitate same-day deliveries and started taxing my purchases.

On the other hand, the economist in me is fully aware of the importance of sales taxes for the state and municipal budgets. And, while I strongly believe that 70% of government employees are redundant and the rest are lazy, I do want all bridges to be repaired on time. Unlike other people, I understand that it's a capital-intensive process and money has to come from somewhere.  I knew only too well that Bluefly, with offices and employees in NYC, should've been taxing my purchases (they didn't) way before the CEO decided to launch a brick-and-mortar outlet.

I am a stickler for the rules that create common platforms for everyone involved: generally accepted accounting principles (GAAP), international financial reporting standards (IFRS), international commercial terms (Incoterms), etc. Speaking the same language prevents misunderstanding. If we cannot avoid paying, collecting, and remitting sales taxes, let's at least stick to the simple rules of physical presence already in place. Even though, the interpretation of what constitutes "physical presence" in the Internet environment could be debatable. I kept pondering, for example, whether, besides the conventional criteria like leased or owned commercial property, payroll, and inventory, the location of web servers and interface workstations should be considered as well.

Yet, one thing has always been clear to me: If you don't have any type of presence in a state and don't use any of the state's resources in order to generate income, you cannot be made responsible for collecting sales taxes in that state. This is not medieval Europe, I thought: just because the governments want additional revenues, they should not just impose new tax-collecting laws like some Sheriff of Nottingham. This would destroy a lot of small businesses that were able to break out of their local boundaries and find their way into the national and even international markets through the web.

What a fool I was! Who cares about small businesses? Members of the government act according to their allegiances to a few Big Players with their big gains and losses at stake.  On one side, there are Wal-Mart, Target, COSTCO, and Amazon (boy, this alliance alone was unimaginable only a few years ago), who are literally everywhere on the ground and on the web. These "poor" leviathans complain that they are at the "price disadvantage," losing customers to those e-tailers (read: smaller businesses), who don't charge sales taxes. "All" they want is to level the playing field, i.e. for everyone to collect taxes everywhere.

On the other side of the barricade is eBay providing thousands of online shops and craftsmen with the means of offering their products to the world.  It stands to lose tons of fees if the members' business volumes contract.  Nobody represents the unaffiliated e-tailers.

Guess who tips the scales? In the beginning of this month, the Senate approved an Internet tax proposal (perversely named Marketplace Fairness Act), which is not based on e-tailers' physical presence at all and will force shoppers to pay sales taxes on the majority of online purchases. In basic terms: all online sellers will have to collect sales taxes and file returns for all states to which they ship their merchandise. 

The plight of small businesses, including the additional workload related to the new responsibilities, is almost an afterthought in the proposed legislature: the ones with less than $1 million in out-of-state sales will be exempt from sales-tax obligations.  What is this stupidly irrelevant number? Are they low-balling like some cheap hagglers?  Again, common ground, people! According to the Small Business Administration's definition, a retailer is considered "small" if the sales do not exceed $5 million to $21 million, depending on the product!

Why our various government bodies always have to be such opportunists and never think about the future impact of their decisions, I have no fucking clue. The e-customers have only this much disposable income: if they have to spend a portion of it on the Internet sales taxes, they will buy less goods.  Consumer market contraction anyone?  And in the long-run every time a small business is hurt, it affects the entire economy.  But who cares about the long run? The governments are more interested in grabbing whatever they can right now, whether they entitled to it or not.       

Wave Goodbye to Quality Standards


Declining-chartRemember how in the beginning of the year, we got a cascade of breaking news about problems with Boeing 787 Dreamliners?  First there was a battery fire, then an oil leak, a fuel leak, engine cracks, a damaged cockpit window; then an emergency landing of an All Nippon Airways 787 followed by the airline's grounding of all 17 of the jets.  On the same day Japan Airlines announced that they will stop flying their 787s as well.  It must've made Qantas's execs feel real good about the cancellation of the 35-units order ($8.5 billion list price - nearly 10% of the projected annual revenue) back in August of 2012 due to endless quality-related delivery delays.

It was not the first time either that the largest aerospace company in the world gave up a painfully huge chunk of already budgeted revenue.  In 2008 Boeing lost its bid for a $40-billion U.S. Air Force (!) contract to build 179 refueling aircrafts.  Whose tankers won favors with the Pentagon? The French competitor's – Airbus (!).  I recall reading at the time that Boeing's executives were so sure that the US defense order was pretty much in their American pockets that the celebration gala was already booked and catered.  I also remember that many inside sources cited the higher quality and reliability of the European tankers.

There is a reason why I consider these Boeing's quality issues to be so distressing.  First, the United States lost significant portions of international market shares in steel, heavy machinery, tools, household appliances, electronics, and consumer goods.  The mere notion of an American TV set became a memory: I still remember how it made me feel reading in 1999 about the buyout of the last U.S. TV maker Zenith Electronics by South Korean LG.  

The decades-long American automotive dominance (at one point 75% of the global supply) was first overtaken in the 1980s by the Japanese manufacturers with far superior quality and lower prices.  Now, China became the world's leader in the production of motor vehicles (23% of the global market).  Only the tremendous support of the US government keeps our carmakers in second place with an 11.8% share.  Then again, the frequency of auto recalls are really getting out of control, so it's anybody's guess how long we will be able to keep this standing.

Even while all these repositionings were taking place, I kept saying that the national economy will not completely deteriorate as long as the US continues supplying the world with two types of products, which pretty much define our era – microprocessors (Intel still manufactures in Chandler, AZ and Hillsboro, OR) and airplanes (Boeing's facilities are 90% domestic).  But now, with Boeing's value in an apparent decline, our country really pushes itself into a danger zone.  I mean, a slice of the defense budget, funded by our own taxes, went, of all countries, to France!!!

How did it happen?  Who's fault was that?  It's everybody's fault (well, maybe it's the media's fault first and then everyone else's).  In this celebrity-obsessed culture, merit-based standards have disappeared.  No one wants to work and be rewarded according to their contributions into the final output, being it tangible products or services.  No one cares about the quality of their work.  And nobody looks into the future.  Everyone wants to be rich and famous with a minimal effort, RIGHT NOW.  US manufacturing is getting suffocated by bizarro day-trading patterns, market-driven executive bonuses, union bargaining, wide-spread ignorance, and laid-back work ethics.  What quality?  As a result, a few products and services still produced domestically have a very low value per dollar spent.  From airplanes to… pretty much everything.

Yes, it's not just the industrial sector.  Every step we take, we are confronted with bad attitude and terrible quality.   Commercial and residential construction is slow and unpredictable.  Most of NYC bridges are overdue for maintenance by decades.  The cranes are falling onto nearby buildings, because City inspectors take bribes.  It's common knowledge that there is no such a thing as a leveled house – they are all crooked, with slanted floors and uneven walls.  It's not enough just to hire expensive contractors – if clients want the renovations to go smoothly and with decent results, they must supervise people who are paid $100-$250 per hour.     

Most doctors don't want to think about the patients' specific symptoms - their primary concerns are billing the insurance and getting pharmaceutical "incentives."  And that's why the US is the most overtested and overmedicated country in the world.  Don't even get me started on the sales staff.  If your mechanic tells you that the car will be ready in 3 hours, you would be wise to multiply that by 2.  The food deliveries are always a hit-or-miss – every other order is messed up.  But everyone expects tips, even if your dishes arrive upside down.  The old doormen in my building used to not only know my name, but even recognize the frequent visitors.  The young replacements cannot even associate my face with my apartment number – it's too much to ask. 

My own receptionist, for God's sake, is too lazy to ask about the caller's business – she just gives me a name.  And even that she doesn't care to get right.  A 45 year-old man with a fairly deep voice called the other day.  "Ted Fisher," he replied to her sleepy "Who's calling?" question.  She patches herself through to my extension and says,"Patricia for you." 

Quote of the Week: More on Futurenomics of Higher Education


College-graduate-jobs-777456"Yes, you are absolute right.  I don't even know what value a college degree has today.  My son is graduating from The University of Tampa this year.  He is having problems securing an internship.  The job search appears to be hopeless altogether.  So, I am like 'Why don't you go back to school and learn some plumbing?  Because I just paid $1,000 to get my toilet unclogged.'"

                                                                        Michele S., CDCS

                                                                        Asst. VP Global Marketing

                                                                        PNC Bank

(From a conversation during business dinner with The Frustrated CFO)

Read more on Futurenomics of Higher Education  

MONEYNEWS: The Shit Will Hit the Fan Soon – Didn’t I Say So?


For a really long time now, I've been explaining (and so have other realists) that the overpricing of pretty pieces of paper (aka stocks, bonds, treasury bills, etc.) caused by the gambling games of cocaine-fueled, high-strung nitwits in high-rise brokerage offices and delusional day-traders glued to their hand-held devices has nothing to do with real production values, revenue growth, profit generation, and economy improvements.  

It's shocking to me that people seriously accept the stock market "rally" of the past few months as a sign of tangible fiscal gains. The same goes for the rise in housing prices resulted from the unprecedentedly low mortgage rates artificially kept down by the US Treasury.

Don't you people understand that, just like with a terminal patient, this is a temporary remission before the downfall?  You cannot take a candy wrapper that worth 1 cent and say that its price is $430 just because there is a schmuck who is willing to shell out that kind of money for it and hope that there is another idiot out there who will pay $450.  Any, more or less logical, person should understand that the real value behind the candy wrapper is still 1 cent, regardless of how much money you pay for it.  But apparently the general public is severely lacking common sense and logical aptitude.

You know what else they are lacking? The disposal income – the money to spend, the moolah to throw around, the dollars to buy the products of the very companies, whose stocks comprise these people's pension and college funds.  If the consumer market contracts, how can companies generate revenues?  How can a nation experience a recovery, when 99.9% of it is getting poorer and poorer by the minute?

This issue of the constant reduction of consumer spending is at the core of the economic disasters ahead of us.  And apparently the public-stock billionaires, whose wealth is so easily added up and compiled into lists in the Forbes's offices, have already caught up with the reality - they are in high-gear disposal mode.

Please-please read this MONEYNEWS' article about Billionaires Dumping Stocks.  In addition to listing the relevant verifiable facts, it also refers readers to the voice of reason – an economist with an impeccable prediction record who foresees a market adjustment as dramatic as 90%!!!  And if you want a really full picture read the other articles linked below as well.   

Related articles

'Aftershock' Author Robert Wiedemer to Moneynews: Investors Buy Into Fed's '100% Fake' Recovery
Billionaires dumping stocks like they're going out of style (including bank stocks).

Tragicomedy of Obama’s Fiscal Cliff “Win”



A20120613_federal_spending_pigccording to common definitions, a tragicomedy is supposed to have both funny and sad elements, making you laugh and then cry, or the other way around.  For me personally, this genre achieves the strongest effect when it generates a subtle emotional shift: one minute you are laughing your head off and in the next moment, even though nothing drastic happens, you find yourself with a face full of tears; you don't even notice how it happens.  You know what I'm talking about…  All Russian "comedies" are tragicomedies and so are Salvador Dali's paintings.  Fellini was a master of the genre - that is because he understood that Life itself is a tragicomedy.  What a movie he could've made out of this fiscal "cliff-hanging" bullshit!

First I was chuckling softly to myself on account of the make-believe "impasse" antics so eagerly played out by the White House and the Capitol up until December 31st after more than 500 (!) days of supposedly diligent preparations.  We know we cannot take this seriously anymore – we've seen this happening before.  Why are they threatening each other?  What were they going to do if they didn't reach some sort of a half-ass decision?  Jump out of their windows?  We are not that lucky. 

I was roaring with laughter when our Nation's executives, who have US Treasury, the Federal Reserve,  IRS, Government Accountability Office, a bunch of Nobel Prize Laureates in Economics and what have you at their disposal, shyly admitted that for decades they've been forgetting about the goddamn INFLATION (!!!) whenever they tried to separate the middle-class from the wealthy or establish alternative-minimum tax (ATM) exclusions.  Now the stupid $250K mark of "the rich" I previously cursed is out of the window replaced with more sensible $400K.  The ATM scheme got eased up as well and it will be indexed to the value of money from now on.         

I hope you agree with me that the 5% increase of the capital gains tax rate from 15% to 20% for the upper class is also a laughable point.  Some commentators declare that the proverbial "1%" lost.  I say, "Bravo!  Great win, you, guys – just 5%!"  Apparently, it's Ok to tax the top tier of my earnings at 35%, while someone with $1 billion of assets and $100 million of annual gains contributes 20%!  Do we really think that additional $5 million will make that much difference in a life of a family that can afford anything they could possibly imagine?  I mean, Dolce and Gabbana just became billionaires on account of increased demand for luxury goods!   

On the other hand, someone who makes $100k a year will really miss the $2,000 that will be taken out of his net earnings due to the reversal of the Social Security tax rates after only two years of relief.  You cannot help feeling a little sad about it, especially when you consider that 77% of American households are affected by this change.  If each of these families loses on average around $1,000 of disposal income, it will translate into nearly $90 billion drop in consumption of goods and services.  I felt kind of embarrassed, though, shedding a tear about it.  After all, we've been contributing 6.2% into Social Security fund forever.  We knew that the 4.2% rate was only a temporary abatement.    

But now, three weeks later, I cannot shake off a feeling of  desperation.  Oh, there were no new developments or anything like that – everyone in Washington was too busy preparing for the inaugural celebrations.  It's just that the general public's hopeless ignorance became evident once again and it is tragic.  It appears that the immediate reduction of the paychecks is one and only concern for the majority of people.  The short-term loss is blinding - it works as a diversion from far more important issues.

People forgot that the fiscal cliff deal wasn't just about the government's revenues.  The other side of it, the one that deals with the federal spendings, wasn't and still hasn't been addressed at all.  If no solution is developed, the Nation will require to borrow again, even though the already raised Debt Ceiling has been (surprise!) reached. 

But I have much scarier questions.  Why the hell the government is using my Social Security contributions to plug their fiscal deficits?  Why are they funding somebody else's payments with my money?  What happened to the money current retirees contributed from their own paychecks?  Where did they go?  Oh, don't worry – I'm well informed.  These are rhetorical questions.  I know that my generation is the last one that MAY BE able to get federal retirement benefits and that our children do not stand a chance to get even 50% of what they shell out of their earnings.  But why are we not wailing about it on every corner?