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Distant Early Warning

dew.jpgOnline Gambling was effectively outlawed in the US today. The legislation is intended to bring ‘fairness’ to the domestic gaming industry which has been harmed by the appearance of off-shore online only gaming companies. What does this mean for brick and mortar retailers squeezed by the internet?

Online gambling was significantly impacting the domestic casino and gambling industry. The high end casinos still got the periodic visits from high rollers, and destination towns like Las Vegas draw folks for the experience, not just the gambling. I suspect that the ranks of Indian casinos, and 2nd tier backwater (stronger language is avoided here) saloons saw a dropoff in revenues as low-end customers migrated their poker playing and sports betting to the Internet. Online gambling was poised to cleanse the weaker operators catering to middle class America.

The gaming companies have a legitimate grievance. They perform regulatory acrobatics to provide services domestically, but online providers face no such restrictions. Technology radically altered the playing field, and the gaming companies turned to the recipient of their protection money, the government. Now, government agencies will now be dispatched in a futile effort to regulate online sin.

If you’re like me, you could care less, but the trend here is clear. Government has now actively leveled the online/offline playing field.

More and more big ticket commerce is moving online, where the cost of shipping is more than offset by large savings in sales tax, as well as the substantially lower fixed operating costs of an online only storefront. Perhaps as part of it’s trip into and out of the financial ICU GM/Ford/Chrysler will seek to sell cars online and reduce their costly dealer distribution strategy. You could buy a car with no sales tax. It isn’t hard to make a list of companies that will eventually feel the pain induced by the tax advantages of online commerce.

What happens when WalMart (WMT) decides that it is no longer fair that companies like Amazon (AMZN) can bill and ship without incurring sales tax? Will municipalities start stopping UPS and Fedex trucks at town limits to impose duty? Federal regulation has so far prevented such activity.

The recent cave-in for online gambling makes me think twice that continuation of the internet sales tax holiday is a sure thing. I put the odds at an online VAT tax at 50/50 in the next five years. If you want to wager with me, I’m sorry, that is now illegal.


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  1. I think your idea as to why offshore online gaming was banned is incorrect. Everything I’ve read or heard points to concerns about the potential addictiveness of the behavior (see the recent NY Times magazine article and other publications). Congress did not attempt to regulate or tax the industry which would have been a more balanced approach to address the situation. The fact that they did not ban online lotteries illustrates how politicians will take the cheap “moral” victory but will not disrupt a profitable, regressive government operation.

    The casinos may be missing out on some of those dollars but there are card clubs in numerous states that make the longer trip to a casino unnecessary. Those are licensed and taxed, but not as accessible to the average taxpayer. If online gaming were licensed and taxed, I’d guess that the casinos would dominate because of branding, etc.

    Though I’ve never played online, I’m disappointed that the Puritan mentality of our government continues to dominate the suppport of personal freedoms.

    Posted by Dave Sherry | October 3, 2006, 10:55 AM
  2. You will not see widespread car buying online without sales tax. You as the buyer are still responsible for paying the tax even if the seller doesn’t collect it, and you can bet that if car sales shifted in any meaningful way that the states would be all over the OEMs to report the names and addresses of every car buyer.

    In New York, (the state with the highest combined state and local tax burden in the land)the economic Kevorkians in Albany have seen fit to add a line to the income tax form where you are to report the sales tax owed on internet and mail order purchases where no sales tax was charged (if you don’t want to add it all up you can just add $200 to your tax bill for the year and the state will call it even). If you leave it blank and sign your return, you have committed tax fraud in New York. I’m sure you will see this in other states in short order. We may see an online VAT, but politically it will be difficult to get the various parties to it to agree to a common system.

    Dave, this had nothing to do with the addictiveness of gambling. If that were the case, the federal government wouldn’t be handing out casinos to every recently rediscovered Indian tribe with a two century old claim to reparations, to say nothing of government’s active promotion of lotteries, horse racing, OTB, etc. The problem is the pols weren’t getting their cut from the guys offshore.

    Posted by Brian Horey | October 3, 2006, 12:30 PM
  3. Economic Kevorkians…. that is good. I may re-use that.

    Posted by Andrew Schmitt | October 3, 2006, 3:41 PM