N.Y. SALES TAX: STORES, NUMBER CRUNCHERS MULL JERSEY BOUNCE
Byline: Eric Wilson / Arthur Friedman
NEW YORK — Here’s the $700 million question: If New York repeals its tax on apparel, will New Yorkers stop buying clothes in New Jersey?
Budget analysts estimate that New York City loses $700 million each year in retail apparel sales to New Jersey alone, where there is no tax on clothing. They cite a total economic loss of $940 million, the difference coming from nonapparel sales and services such as transportation and parking.
How much New York could get back if the state eliminates the tax on apparel, which includes 4 percent state tax and an additional 2 to 4.5 percent depending on the county, has captivated the retail community here and in bordering counties, as state lawmakers consider the repeal.
“This would truly level the playing field between New York and New Jersey,” said Barbara Randall, executive director of the Fashion Center Business Improvement District, expressing a common sentiment among state merchants who feel the disparity in apparel levies has turned the state line into a retail battlefront.
The flames of war were stoked by a one-week “experiment” — a moratorium on state and most municipal taxes on apparel costing under $500 from Jan. 18-24 — that resulted in such dramatic sales gains that New York Mayor Rudolph W. Giuliani, New York Gov. George E. Pataki and retailers across the state declared it an unqualified success and rallied for a repeal. However, their positions on how quickly the tax should be eliminated are at odds.
Officials have only begun to tally the 560,000 Schedule H forms — reports detailing the amount of clothing sold without tax in January — that retailers filed in April with the Department of Taxation and Finance. A detailed picture of the “spike” in sales is not likely to be complete before November, according to a spokesman for the department.
Despite a lack of clear data on how New Yorkers reacted to the sales tax moratorium, most retailers are predicting that sales would increase as a result of a repeal, but they are left guessing as to what the cross-border impacts would be.
Ed Goldberg, vice president of consumer affairs at Macy’s, said the store is a “very strong supporter of the legislative efforts to repeal or lessen the sales tax.”
“Our position has always been that with an 8.25 percent tax on apparel under $500 per item, New York stores don’t have a competitive, level playing field on which to operate,” Goldberg said. “During the test week, the sales volume at our New York stores was terrific, but our border stores in New Jersey did extremely well at the same time.”
Goldberg said there are several reasons business would increase in the New York stores if the tax were repealed. First, if consumer buying power remained constant, shoppers would potentially spend 8.25 percent more on merchandise. Second, commuters from New Jersey — or, in Goldberg’s case, from Pennsylvania — who normally refrained from making apparel purchases during their lunch hours or on their way home, would buy more often in New York. In addition, a percentage of weekend shoppers would stay in the city instead of trekking to Garden State malls or outlets.
“As a department store, we rely on impulse buying,” Goldberg said. “If we, in fact, get more people in the store, this could result in more overall buying and the greater potential for purchasing items higher than $500 or nonapparel and footwear items.”
While the loss of estimated tax revenue is a concern, Goldberg agrees with many politicians that there would be a countervailing balance.
“The theory is that the volume increase would mean more jobs — and more people paying income tax — and the increased consumer activity would result in more tax revenues on items or services still taxable,” Goldberg said. “In addition, presumably, stores would make more profits and therefore pay more corporate income taxes.”
While acknowledging that tax repeal could get caught up in the state’s annual budget maneuvering, Goldberg predicts “the legislature, along with Gov. Pataki, is prepared to take the bold step to put New York on equal footing with its neighboring states.”
“It would have an effect on the New York consumers who have historically gone to New Jersey on the weekend to buy soft goods,” said Jack Smith, chief executive officer and president of The Sports Authority. “Eight-and-a-quarter percent is a pretty good savings. I think it would bring some business back to Manhattan and cause some people to buy who otherwise might not.”
Smith said Sports Authority’s northern New Jersey stores in Paramus, Wayne and Woodbridge have a steady base of New York shoppers, although it accounts for a small overall percentage of the business. As for the actual percentage of New Yorkers crossing the Hudson River to shop in New Jersey, Smith said, “If I knew, I wouldn’t tell you.”
“The George Washington Bridge and the Lincoln and Holland Tunnels might collect less tolls, however,” Smith added.
Sales in New York were so dramatically higher during the week that apparel retailers at many price points were caught off guard. Brooks Bros.’ units collectively reported 150 percent sales gains in New York, with a 173 percent rise at its Madison Avenue shop, 218 percent downtown at Liberty Plaza, and a whopping 524 percent in Niagara Falls, just across the border from neighboring Ontario, Canada, where a 15 percent tax is levied on apparel.
“We didn’t think at the high end of the market that the customer travels to New Jersey to avoid paying sales tax,” said Jack Donahue, chief financial officer of Paul Stuart. “We never thought the increase in business would be significant, but it was very significant. It was so startling that you have to attribute a major portion to tax abatement week.”
Paul Stuart on Madison Avenue experienced a 70 percent sales gain for the week. Roughly 75 percent of Paul Stuart’s business comes from New Yorkers who are shopping for a specific, high-end product, factors that led Donahue to underestimate the week’s returns.
However, without the tax on apparel, Donahue agreed that New Yorkers would spend more on apparel, although not at levels consistent with the tax abatement week. Increases would temper over a short period of time, eventually settling around an estimated 5 percent gain in sales, he said.
Also significant from the abatement week were sales increases of more than 100 percent at stores in the Staten Island Mall, the major shopping center in a borough from which consumers can easily travel to New Jersey over the Goethals or Bayonne Bridges or Outerbridge Crossing.
But not all retailers are convinced that, over time, a significant gain in business would be realized.
“From the data we have, I’m hard-pressed to find any material impact during that one week,” said Steven Wishner, vice president and treasurer of T.J. Maxx. “That said, sales throughout the entire month were absolutely through the roof, but I could not see a dramatic change for that week.
“For any increase you see in that week, one word of caution is to question whether that represents an absolute lift in sales or if the sales of that week are borrowing sales from other weeks.”
Agreeing with the FCBID’s Randall was Dan Biederman, president of the 34th Street Partnership and the Grand Central Partnership, who feels the tax repeal is crucial to retailing in New York City, particularly in drawing sales from consumers who consciously shop in New Jersey to avoid paying tax.
Biederman said the tax repeal week “showed enormous impact” for constituents of the Grand Central Partnership and the 34th Street Partnership.
“No cut could be more useful for the retail life of our sections of New York City,” he said.
Randall speculated the sales gains would be long-lasting because the portion of New Yorkers who defer spending on nonluxury apparel here would be less likely to put off shopping if the tax is repealed.
For example, Randall, a New York City resident, admitted that she shops for her children’s apparel on a seasonal basis in New Jersey.
“If you save money on taxes, then you have a little more disposable income,” she said. “If you save $10 to $15, you can take a cab, you can stop and have lunch at a deli or you can buy a Teenie Beanie Baby at McDonald’s.”
Across the Hudson River, retailers are monitoring the tax situation here, although some were hesitant to concede that New Yorkers would stop shopping in New Jersey, particularly in enclosed malls, where access to stores and parking is more convenient.
“We recognize that there’s a lot of cross-shopping that goes on between New York and New Jersey,” said Melanie Willoughby, president of the New Jersey Retail Merchants Association. “The fact is that there are border stores and malls that have benefited from New Jersey having no apparel tax while New York has had a substantial tax on apparel.”
Willoughby said that if New York repeals its tax, there will be revenue lost to New Jersey merchants, particularly at the onset.
“No doubt, some shopping patterns will change, but there are factors other than the sales tax that determine cost and shopping preferences,” Willoughby said. “Lower rents and operating costs in part determine the price of the merchandise, and those are factors that Manhattan retailers in particular must deal with. There’s also the type of stores available, and the type of shopping experience the consumer desires.”
Willoughby said her association “respects the efforts of New York State legislators to do what’s in the best interest of its citizens,” and added, “In New Jersey, the tax policy is not to tax products that are necessities, and clothing is considered a necessity.”
At the Garden State Plaza in Paramus, N.J., mall management sees virtually no loss of revenue if the repeal is instituted. Lucille Dehart, director of marketing, said at peak shopping periods — Saturday and holidays — the GSP has a maximum of 15 percent of shoppers from New York.
“We did an analysis when the one-week moratorium was held in January, and we found our business virtually unaffected,” Dehart said. “In fact, in the period following the one-week test, we found a heightened awareness among consumers that New Jersey doesn’t have an apparel tax.”
Dehart said that while New York stores got a big bump in business during the no-tax week, “it remains to be seen whether, in the long-term, the same results would be achieved.”
“I would think the results would be less impactful for New York stores,” Dehart said. “Short-term shopping patterns are different than long-term shopping patterns.”
Dehart said the appeal for consumers of a mall like GSP, in the heart of the most dense retail corridor in the state, goes beyond the tax savings. Consumers are attracted to climate-controlled, indoor shopping with free parking, food courts and “a tenant mix unparalleled in any shopping district.”
“There isn’t a Neiman Marcus or Nordstrom in New York,” Dehart said. “Combine that with our other anchors — Macy’s, J.C. Penney and Lord & Taylor — and the more than 300 retailers over 2,000 square feet that the mall will encompass once the last stage of our expansion is completed this summer — and we have an atmosphere that can’t be duplicated with street shopping.”
Traffic at the Willowbrook Mall in Wayne, N.J., was actually higher during January’s tax abatement week, probably because the event coincided with the mall’s largest advertising promotion of the year, an annual sidewalk sale and January clearances, said Elysa Leonard, marketing manager.
“But if they would do this permanently, we’d have to look at this much more seriously,” Leonard said. “It would be a completely different ballgame.”
The mall, with 180 stores, including a new L&T and anchors Macy’s, Sears and Stern’s, is 25 miles outside of New York City, from which a “large portion of our customers” come, Leonard said.
“I think what you will see is somewhere in between the euphoria of the one-week tax holiday and the position of many of the New Jersey malls that nothing will change,” said Isaac Lagnado, principal of Tactical Retail Solutions, a marketing consulting firm. “Our research shows there is a large following of New Yorkers going to New Jersey to shop. Maybe a third of those will stop making the trip if the tax is repealed.”
Lagnado said he agreed with the premise that the tax benefits of increased sales and employment would more than make up for the revenue lost from repealing the levy on soft goods. He disagreed with the “New Jersey theory” that the mall experience cannot be duplicated in New York. He said Manhattanites in particular don’t like to drive to shop and have enough diversity of stores to satisfy their needs.
However, as a potential boon to the New York side takes shape in the legislature, there is one caveat that has caused concern for some retailers here. In one form of tax repeal put forth by the State Senate, the tax would be repealed gradually over four years, rather than an outright repeal, as supported by the Assembly and Mayor Giuliani.
A gradual repeal would, among other concerns, further complicate the tax recording process at registers and would not discourage consumers from crossing state lines, several merchants said.
There is no tax on apparel in Pennsylvania, New Jersey or Massachusetts, while the levy is 5 percent in Vermont, 6 percent in Connecticut, 15 percent in Ontario and 14 percent in Quebec.
Also, some city lobbyists have proposed not giving localities the option of repealing their shares of tax on apparel throughout the state. However, the two proposals that have advanced through the legislature include provisions that would allow localities that option.
Shawn Kahle, vice president of corporate affairs at Kmart Corp., said the store’s position is that if the tax is repealed, it should not be phased in and that a county or municipal exclusion should not be allowed.
Kahle said the concern was that both of these routes could lead to “tax wars” between states and among municipalities.