Citing a variety of marketplace challenges, Tops Friendly Markets, LLC, which counts locations in New Paltz, Rhinebeck, LaGrangeville and Tannersville among its 169 supermarkets, filed for bankruptcy last week, citing a variety of reasons. Most significant was a debt load including $560 million in secured notes held by bondholders. According to SEC filings, Tops’ total debt had jumped from $460 million to $666 million after management acquired the firm in a leveraged buyout from a Morgan Stanley subsidiary in 2013. Of the $724 million in debt Tops had accumulated as of January 2017, nearly $350 million was paid in dividends to Morgan Stanley.
“We are now undertaking a financial restructuring, through which we expect to substantially reduce our debt and achieve long-term financial flexibility,” Tops CEO Frank Curci said in a statement last Wednesday. With a $125-million debtor-in-possession loan from noteholders and a $140-million loan from Bank of America, the company hopes for a quick reorganization. Meanwhile, Curci assured the company’s customers and vendors that Tops’ day-to-day business would continue without interruption despite the Chapter 11 bankruptcy.
Bondholders may agree in bankruptcy court to a markdown in the value of their debt holdings in exchange for stock ownership. Cutting Tops’ interest payments by $60 million, as is being discussed, would have reduced the supermarket firm’s loss last year to a much more manageable $20 million.
Regional supermarket chains have been having a tough time in recent years. Other challenges the 56-year-old Tops market chain cited included “intense competition from online retail giants such as Amazon…and other low-cost rivals,” falling food prices, a heavily unionized workforce and changing consumer tastes.
The Reuters news story on the bankruptcy noted that Amazon had last year bought Whole Foods Market, which it said “overlaps with Tops in parts of New York.” Amazon would gain a substantial price edge if its customers didn’t have to pay sales taxes, several financial commentators have noted.
Consumer preferences keep changing, and that change brings with it disruption. And the consequences of that disruption can profoundly affect every economic institution, even government.
How do you run your business when your leading source of income seems unpredictably affected more by the vagaries of chance than by underlying economic conditions? It isn’t easy. Welcome to New York State, where the state government’s system of allocating sales taxes to counties and cities is plagued with administrative inconsistencies, high compliance costs and frequent “technical adjustments.” The harm from the last is described as “distribution adjustment impacts.” Whatever the terminology, the story is one of unpredictability in terms of county government’s most important source of revenue. That’s disruptive.
The mother of all recent technical adjustments was a one-time 2016 correction of $238 million to New York City. The state retroactively corrected an error that had resulted in New York City receiving lower sales-tax distributions for several years than the state’s collections there.
On a smaller scale, state collections in Putnam County were up 9.5 percent in 2016 and down 0.45 percent in 2017 and in Delaware County up 7.0 percent in 2016 and up only 0.24 percent in 2017. Both counties, the state comptroller’s office said, experienced “significant corrections that boosted their numbers in 2016.”
Collection errors in sales-tax distribution are not the only thing filers and local taxing authorities need to worry about. The rapid spread of electronic commerce continues to play an important role in the recent precipitous decline of certain types and categories of traditional local shopping — particularly because many e-merchants use third-party vendors to avoid sales taxes. E-commerce was estimated last year at 8.4 percent of retail sales in the United States, three points higher than only four years before. A recent census estimate is that online retail sales will reach $485 billion in 2021. As e-commerce options have crowded out brick-and-mortar stores, state tax authorities have been struggling to capture what they regard as lost revenues from on-line shopping. No tax revenue, no tax distribution.
It’s not an easy task. Much of e-commerce still doesn’t pay taxes, leaving their brick-and-mortar competitors at a disadvantage and state and local taxing authorities frustrated.
The United States Supreme Court is scheduled to hear arguments on whether to overrule the precedent in Quill v. North Dakota that online retailers only have to collect sales taxes in the states where they have a physical presence. Opponents of that precedent have argued that it has resulted in a complex and irrational patchwork of laws harming interstate commerce. The case which will be taken up in April, South Dakota v. Wayfair Inc., might result in new rules.
Realizing that it was growing to the point where it would have a physical presence virtually everywhere, e-commerce giant Amazon announced in 2016 that it would collect sales taxes in all states. But it provided a loophole to its customers: Items sold by third-party vendors carry no obligation on the part of Amazon in regard to sales tax.
“Avoiding sales tax while shopping on Amazon is actually pretty simple,” explained a site called Mile Writer. Always check third-party seller pricing before checking out, the site advised. It doesn’t hurt to take that extra click to check. More often than not, you can find a third party selling exactly the same item at the same price or lower, with Prime shipping thrown in.
The Mile Writer advice ended with what I detected as a cynical touch: “While you don’t have to shell over sales tax at checkout, you’re supposed to report all out-of-state and Internet purchases to figure out what taxes you owe when you file every year. So yeah, um. Do that, please.”
Tax avoidance maybe one reason consumers shop on-line, of course, but it is by no means the only reason.
Somehow, it’s hard to see plain-vanilla Tops competing head to head with upscale Whole Foods for the same customers. According to a 2017 Moody’s study cited by state comptroller Tom DiNapoli, on-line transactions accounted for half the sales in the office supply category, 30 percent of auto-parts sales, 20 percent of total sales in the department-store category, and 17 percent of sales in apparel and footwear. Only one percent of supermarket sales were on-line. The supermarket business is very competitive and has low profit margins. Amazon has higher-priority targets elsewhere, though the supermarkets are still worried.
Financial analysts have been warning that middle-market supermarket groups like Tops face competition from a number of directions: cost-conscious competitors like Aldi, peers like Wegmans and Price Chopper, the huge food component of Walmart and the innovative and aggressive Amazon. And lately, of course, meal-kit delivery companies have entered the marketplace.
The greater integration of e-commerce into the tax collection system, which is probably inevitable, will unquestionably increase local sales-tax revenue. But it will have other tax consequences as well. As weakened brick-and-mortar retailers become increasingly more obsolete, the tax burden among the different classes of property will also shift.
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