After a recent fiasco in which Target’s limited-edition “Lilly Pulitzer x Target” collection sold out in just a few hours on launch day, Target took a bold step to impose quantity limits and other restrictions on customer purchases. The ordeal turned heads and placed Target at the center of attention regarding so-called “retail arbitrage,” a concept that poses a mounting problem for traditional retailers in the Internet Age.
Retail arbitrage occurs when a person purchases products from a retailer and then sells them at marked-up prices elsewhere, typically online on websites such as Amazon or eBay. That’s exactly what happened in the “Lilly Pulitzer x Target” situation.
Every additional cent that an arbitrageur pays to obtain a product decreases the profit that she can expect to enjoy when selling it later. Sales tax therefore affects retail arbitrage significantly, as it changes the spread between the arbitrageur’s buy and sell prices.
The common “sale for resale” sales tax exemption adds some additional complexity here. The sale for resale exemption operates on a theory that charging sales tax at every stage in a supply chain would multiply (or “pyramid”) the sales tax that an end purchaser pays. For example, consider a situation in which a retailer purchases a toy from a toy manufacturer and then sells it to a consumer. Most states would impose sales tax on the consumer’s end purchase, but they would exempt the retailer’s intermediate purchase under the sale for resale exemption. This is reasonable because otherwise the retailer would probably increase the toy’s price, effectively passing the additional sales tax to the consumer and causing her to pay more than what is listed on the receipt.
In the retail arbitrage context, the sale for resale exemption puts retailers’ and arbitrageurs’ interests directly in conflict. This is because an intermediate purchaser must typically present to the seller a valid and completed state-mandated resale certificate to qualify for the exemption. However, the seller can refuse to accept it. For example, a New York publication explains that “[s]ellers have the right to refuse your exemption certificate, even if it is correct and properly completed.” Reports indicate that Target now liberally refuses resale certificates from suspected retail arbitrageurs. Sometimes, it refuses the transaction entirely. Target is likely not the only retailer to do so.
Even aside from the sales tax issue, retail arbitrage is big concern for traditional brick and mortar stores, as NPR's Planet Money team reports. Arbitrageurs are purchasing multiple cartloads of products at places like Target and Walmart and then selling them at marked-up prices on sites like Amazon and eBay. Retailers argue that other customers become disheartened and frustrated when they find themselves unable to purchase in-demand products at stores.
The present dispute between retailers and arbitrageurs seems likely to escalate further. Finding and exploiting price gaps in any market has always been a difficult endeavor, but retail opportunities are significant enough now that people have developed entire business models around the practice.
It is not obvious whether legislators will respond to traditional retailers’ open concerns about retail arbitrage, but perhaps the sales tax implications here could play a role in future tax reform. Until then, retailers will surely continue finding creative ways to address what they perceive as opportunistic purchasing habits.
Continue the discussion on LinkedIn: Is retail arbitrage opportunism or a valid business practice?
For more information about state tax issues, sign up for a free trial on Bloomberg BNA’s Premier State Tax Library.
By Ryan J. Voorhees
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