Decision Making and Buying Local (Dec 2013 post)

I was out shopping last night at the Midnight Madness Sale in downtown Ann Arbor and thought about the column I wrote last year about buying local.  I thought that it would be a good idea to re-post it again.  I hope to be back with new columns soon.  Until then, enjoy the holidays!

(Originally posted 12/08/13)

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Since we are now in the midst of holiday shopping, I thought I would write a post about how buying local can benefit the community.   I am going to concentrate on simply the economics of buying local in general, and not get into the Buy Local Food movement that is very strong in our community

Here in Ann Arbor we have a dedicated non-profit group “Think Local First” whose “mission is to support and cultivate locally-owned, independent businesses in Washtenaw County, Michigan that are committed to making our community a healthier and more vibrant place to live”.  This group functions as a business network for local businesses who commit to purchasing goods and services from local sources.  These businesses earn their money from local patrons and then give back to the community by buying local from as many local sources as possible.  They make their money here, so they spend it here. The small businesses involved with this group understand the need of buying local (by purchasing here in town) and buying locally (purchasing products manufactured here).

Consumers can also buy local whenever possible.  Spending money locally helps local employment, the environment, and the economy over all.  It helps small businesses compete in the harsh retail world.  A growing problem is that most consumers don’t actually realize how their shopping habits affect the general economy.  Although, the consumer is for ‘Buy Local’ in general, they tend to think of the narrow definition of ‘Buy Local’ and don’t see the residual effects of their buying practices.

Buying local

The typical way one thinks about ‘Buying Local’ is to patronize small local businesses (non-chain stores). This can consist of simply shopping at your local farmers market, supporting your downtown stores/restaurants, and shopping at other privately owned shops and stores throughout the area.  The obvious benefit of this is that you are supporting your local economy where much of the profits are invested directly back to the community.  Shopping local allows downtown stores to survive against the big malls that appear to pull shoppers into them.

This past week there was a video released by Chris Good that showcases the buy local movement.1  This is a music video that supports local businesses and highlights many of the well-known businesses we all associate with Ann Arbor.  Take a look at the video.

(The video is 10 minutes long; first 6 minutes is the music video, the last 4 minutes is a compilation of the small businesses who supported the video project)

In the Ann Arbor news article introducing this video1, Chris Good, who is passionate about the Buy Local movement says this:

“It really is a choice where we spend our dollars, and for a town like Ann Arbor that is so lucky to have a vibrant downtown, it’s a good reminder for all of us to keep supporting those businesses,” Good said:
He added: “I think it’s both an uplifting message of celebration for the Ann Arbor community in particular, but also a warning of sorts that we need to continue supporting these businesses, or who knows.”

“Or who knows”… is right.  If we want to have a vibrant downtown, we need to support our downtown.  If you are lucky enough to have a neighborhood store that is walkable from your neighborhood, you need to support that store and actually shop there.  Buying local is important if we don’t want our community to turn into all big box/chain stores.

Buying Locally

However, there is more to buying local than just patronizing small businesses.  There are more detailed and complicated aspects of buying local that can benefit the community that many of you might not have thought about.

Aaron Fown has a series of videos on You Tube called “The Trip for Life” and he has a great video explaining the merits of buying locally packaged foods (not just locally sold regardless of where they were packaged or manufactured). In this video he talks about the reasons why it is beneficial to choose a locally packaged product vs. a non-locally packaged product.  Both are sold here locally, but there are some extra benefits for the locally packaged foods.  (Locally packaged does not mean ‘Ann Arbor’ only packaged.   It could mean MI, OH, IN, Midwest etc.)

He lists three reasons how buying locally packaged food items help the community.

  1. Economic reasons-when you purchase non-locally packaged items; the money is not invested in our community…in the manufacturing side of things.
  2. Environmental- we don’t waste energy on shipping heavy items many miles.
  3. We can help the community to be more resilient if rough times are in the future.  Our community can be more sustainable.

Take a look at his video.  He filmed it at Hillers Grocery store in Ann Arbor. (~8 minutes)

This does not just apply to food, but also to any item that is manufactured/packaged locally. If you have the choice between local brand vs a national brand, the local brand will have some extra benefits for the community, so why not chose that one?  Obviously, we aren’t going to change all of our purchases over to local brands, but when you can, you should, is the point.

Buying at big box and other chain stores is not all bad

There are times that local businesses just don’t have what you want or need. It is not reasonable to think that we can switch all of our purchases over to ‘local only’, whether it is locally packaged or not. Quite simply not everything is made in the Midwest.  Sometimes a chain or big box store is where we need to shop.  I shop at them and feel that they have their place in he scheme of all local retail.

However, over the past few years, many people have switched to on-line shopping instead of shopping at large chain/big box stores.  On-line shopping, although convenient, has its perils.  Online shopping is not equivalent to shopping locally .

First is the obvious debate over the sales tax.  When you buy an item from an on-line retailer that does not have a ‘physical presence’ in your state you typically don’t pay sales tax (1992 Quill Corp. v. North Dakota).  This is a 6 % discount for Michigan residents who chose to not go shopping in a brick and mortar store locally  However, this puts locally owned small businesses, franchises and even big box stores at a disadvantage.  Many consumers will physically shop for what they want in a local store and then go online to find the lowest price or to avoid the tax.  Consumers are using some of the stores as ‘showrooms’ and then only purchasing their items when they get home.  Since almost everything can be found at an on-line store for less money and possibly sales tax free, consumers choose on-line shopping and purchase from the cheapest retail outlet in order to save a buck.  The state coffers ends up losing out on much needed revenue because of this.

The federal government has been trying to fix this problem, with the US Senate passing The Marketplace Fairness Act last May which will force on-line reatilers to collect state sales tax..  Now the bill sits in the House Judiciary committee waiting for action.  On-line retailers are obviously against this and have petitioned the Supreme Court to take up the case. However, as recently as last week, the US Supreme Court has refused to hear the Amazon request to review the Internet sales tax issue.  While we wait for the Federal government to decide on an action plan,  we may be able to make headway on the state level to fix the problem.

Back in September 2013, the State of Michigan legislature (a house panel) was looking into requiring all large Internet out-of-state companies to pay sales taxes.  They are doing this by expanding the definition of what is considered an in-state company with a ‘physical presence’.  From a Mlive capital report2:

Michigan law requires companies with a physical presence in the state to collect a six percent sales tax, and local businesses say that gives out-of-state companies a distinct advantage when it comes to internet sales.

House Bills 4202 and 4203 would expand the concept of physical presence to include a broad nexus of warehouses, offices, distribution facilities, subsidiaries or affiliate partners in Michigan who direct internet shoppers to out-of-state websites in exchange for a commission.

The House Tax Policy Committee approved the bills in a series of 9-1-5 votes, with five members passing on the controversial legislation. Three of five Democrats joined six of 10 Republicans in supporting the measure.  State Rep. Aric Nesbitt, R-Lawton, was the only “no” vote.

This legislation will now move out of the committee to the full house for consideration.  It might be a tough sell to get this through the Michigan house, but if it does pass, it would undoubtedly be in the best interest of the state.  The State of Michigan will then be able to force all major internet companies to collect sales tax.

Online retailers, such as Amazon, obviously are against a Federal law as well as state laws  because they don’t want to track the state taxes for 50 different states and they think that they will lose business due to the additional taxes for their customers.  Other anti-tax groups say this legislation is not needed because most states have a “use tax” required for all purchases made on the internet.  The consumer is responsible for paying the sales tax under the ‘use tax’ system.  Retailers claim that collecting the sales tax is too much of a burden for them to collect for every state.  Requiring the internet retailer to collect the sales tax moves the onus onto the retailer instead of the consumer.  In this day and age of computers it should not be that great a burden on the retailer to collect this tax.

The problem right now due to our current system that requires consumers to pay sales tax through a ‘use tax’ is that the consumers do not pay the use tax.  Have you paid use tax?  Do you know of anyone who declared the sales tax for all their internet purchases on their State of Michigan tax forms?  Our current system requires something that is nonfunctional and unenforceable at this point.  Having the retailer collect the sales tax is the proper way to go IMO.

Don’t get me wrong; I do buy some things on-line, but not all that much.  Actually probably only from companies that already have a presence in the state and I do get charged for sales tax.  The rare purchase every few years that does not charge me sales tax is long forgotten by the time I fill out my tax forms.  I am not a stickler for everyone paying the use tax all the time.  However, those that insist on buying everything online from obscure companies just to avoid taxes are not acting all that ethically IMO.  I am not going to go as far as to call those who purposely buy online to avoid the sales tax a “tax cheater’ because right now the ‘use tax’ is not really a system that I would bet most know about at all.  Some consumers may not even realize that they are not paying sales tax on their on-line purchases.  On-line shopping from retailers who do not charge sales tax is a way to go-around an existing tax (this is not an additional tax) where the enforcement is non-existent.  It needs to be fixed.

Now you may be saying to yourself, ‘so what, I don’t want to pay the 6% sales tax.  I like paying less tax.’  Well to that I say…. I hope you never complain about the potholes, or the cuts to schools or the cuts to safety services, etc.  Taxes feed all public expenses.  State tax revenue trickles down to local municipalities to cover much needed expenses.  By purchasing online from retailers that don’t collect your sales tax and then by not paying your use tax, you are hurting the community as a whole.

How many stores will go under because of the unfair advantage of the sales tax? The playing field needs to be leveled so all are playing by the same rules.  It is a matter of fairness and equity for all stores.

The second peril has to do with the ‘physical’ existence of a local store.  If you always use local stores as a “showroom” and then go home to buy on-line, you may find that in the future your local store may not be there anymore.  Local big box stores and chains need to have customers to stay in business.  Yes, you are paying sales tax from these online retailers because they have a store located within the state, but the local Big Box/chain store lost the business. Not all these stores are corporate owned and some are franchises with private owners.  You effect their bottom line if you ‘showroom’ and then go home to buy from the corporate website.  If these stores don’t have the inventory, then obviously buying it online from that same retailer is the next best thing.  However, the act of ‘show rooming’ can have a dire effect on the economy.

If these local stores close, the jobs disappear with them.  Although these may be low paying jobs, they still are jobs. The US economy is a consumer economy where consumer spending drives the economy.  Less jobs, mean less spending.  The demise of large chain stores because of the preference for large on-line retailers could have a drastic effect on the economy with no solution that would be immediate.

Retailers are always looking to see where their customer base is located.  Have you ever been in a store where they ask for your zip code?  The stores ask this to see where the customer base lives.  If customers are traveling far distances to shop then the company might open a store closer to the customer base.  If most customers are not local, the store may close or maybe relocate closer to the customer base.  It is important for each store to have a steady customer base for them to survive.  If you purposely take yourself out of the customer base of a brick and mortar store, you may find it disappear one day.

So what’s a consumer to do?

There is no easy answer to any of this.  The solution will be much bigger than the simplistic ideas I mentioned above. Buying local by patronizing small business, buying products made locally, as does purchasing in all local stores vs. the internet, can help the local economy, but we can’t shop our way to a better economy in general.  More needs to be done

Stacy Mitchell gives a very informative TED Talk3 Why We Can’t Shop Our Way to a Better Economy. She describes the problems with a consumer economy and links consumer decision making to a possible solution to these problems.  She says it much better than I ever could so I will let you listen rather than read:

(Starts out slow but gets better) (~15 minutes)

“There is nothing inevitable about the structure of our economy.  It s not the product of some kind of natural evolution, it’s the logical outcome of a set of policies.”….“The only way we want to bring about the change we want to see is through our buying decisions.
 “We need to change the underlying structure that creates the choices in the first place, we cannot do that by the sum of our individual actions in the marketplace, we can only do that by acting collectively as citizens.”
“How do we begin to see our (buying local) not as the answer but as a first step. How do we transform this remarkable consumer movement into something more?  How do we make it a political movement?”

I believe this whole-heatedly.  All of us together need to decide what type of economy we want, what is considered fair, and what we don’t want to put up with.

Decision-making

If consDecision-Makingumer decision-making plays a large part in getting people to Buy Local at small business, to Buy Local at a brick and mortar/chain store or to buy over the internet then what causes the consumer to chose one of the options?  What makes a consumer say ‘yes’ to one choice vs. the others?

In another TED Talk3,  Devora Rogers gives a talk entitled, “The Science of Shopping and Future of Retail”.  She compares shopping to decision making, speaks about  how consumers gather information, and where they go to find the information.  She says people don’t want ‘new’ shopping experiences they want ‘better’ shopping experiences.

Take a look:  (~20 minutes)

She ends with saying that the future of retail is the new golden era of retail where marketers will be moving from the place of manipulation and gimmicks and sale-abration to a relationship of listening where they don’t have to guess what your needs are and respond in kind.

Figuring out how consumers decide to buy is the real lynchpin to all of this.  But is it even possible to do that? I don’t know.

Conclusion

We may not be able to Buy Local all the time, but we can Buy Local some of the time. Every little bit helps our local community and local economy.  I believe that most people get the concept of why they need to support their local small businesses dowdecision-making-process1ntown and around town, but most don’t realize the effect that their internet shopping can have on local jobs and state taxes. Most people shop the internet out of convenience and not for some anti-tax ideology.  The next time you sit down at the computer to order an item, think about maybe…just maybe…going to a brick and mortar store in person.  Think about making the world a better place one step at a time.

ratio decidendi

-MOTL

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1  Lizzy Alfs, “New ‘Buy Local’ music video showcases dozens of Ann Arbor businesses, artists.”  Ann Arbor News, Dec 5, 2013.

2  Jonathan Oosting, “Internet sales tax bill seeking collection from Amazon, Overstock heads to Michigan House”.  Mlive.com, Sept 11, 2013.

3 TED Talks is a daily video podcast of the best talks and performances from TED conferences, TEDx events and partners — anywhere the world’s leading thinkers and doers give the talk of their lives in 18 minutes. The TED Talks series is widely credited with creating a new category in online media, and we continue to innovate at every step.

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