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The Amazon Effect: E-Commerce Transforms Puerto Rico’s Retail Landscape

By on April 14, 2016

When it comes to the retail sector, and specifically brick-and-mortar stores, e-commerce has become the elephant in the room, a trend that has rapidly changed the global dynamics of the industry and whose effects are being particularly felt in Puerto Rico.

For local consumers eager to stretch their dollars, the appeal of online shopping platforms is readily apparent: a wide variety of products shown in an engaging manner, very low prices and in the case of Amazon Prime, free shipping on most goods. This partly explains some of the findings made by the Puerto Rico Sales & Marketing Executives Association’s 2014 Digital Study. According to the report, about 612,000 local consumers carry out online purchases and transactions on a regular basis, a number that has only grown in recent years.

COVER STORY APR. 14, 2016 ARTWORKAs a result, the advent of e-commerce has transformed the shopping landscape in just a few short years, to the point that it has led to the exit of several major chains from the local market. For instance, when sporting goods retailer Sports Authority announced its impending closing of 140 stores, including all those in Puerto Rico, CEO Michael E. Foss mostly attributed the decision to “the increasing amount of shopping that is occurring online.”

By the same token, GameStop’s recent exit from local shopping malls partly corresponds to the rise of online sale and distribution channels for videogames through services such as Sony’s PlayStation Network and Microsoft’s Xbox Live, as well as the rise of downloadable extra content for popular games.

According to Arnaldo Oliveras—who is the founder & president of Space Mart Retail & Real Estate Solutions, a shopping-center service provider, and heads the local chapter of the International Council of Shopping Centers (ICSC), a global shopping center trade association—sales in brick-and-mortar stores this past holiday season went down by around 9%, while those of the e-commerce sector went up by 17%. “This means orders from Puerto Rico to sites such as Amazon, Bloomingdales, you name it,” he said.

Such numbers should not surprise anyone, Oliveras noted. “We foretold what was going to happen years ago,” he said. “Statistics reveal that there are more packages being delivered than letters [by the U.S. Post Office].” In keeping with their technological knowhow, e-commerce giants such as Amazon are even experimenting with using drones as delivery channels, which could render the post office irrelevant in the coming years as far as online retail goes.

While Amazon has arguably taken the limelight on the e-commerce front, other sites are proving just as impactful. There are old mainstays such as eBay, of course, but several relative upstarts are quickly rising in this segment. One example is Alibaba. The Chinese company, founded in 1999, has since become a retail juggernaut in the Eastern Hemisphere and is rapidly making waves in the U.S., with one of its subsidiaries, Taobao, recently turning into the second-biggest retailer on the globe, only surpassed by Wal-Mart.

Another rising player is Wish, which specializes in mobile shopping, with customers carrying out purchases through a robust smartphone app. Based in San Francisco and founded by Peter Szulscewski, a computer scientist and former Google employee, the company recently raised nearly $600 million from investors, among them, China’s second-biggest online retailer.

Perhaps not surprisingly, Puerto Rico government officials have tried to capture a slice of that lucrative e-commerce pie for tax revenue purposes. Legislation on the matter has also been brought about due to complaints from local retailers, who have argued that online shopping constitutes an unfair advantage over stores with a physical presence on the island. This is because the current 11.5% sales & use tax is not charged when a retailer does not have a physical presence in Puerto Rico.

A legal framework to collect sales taxes from online shopping retailers has been in place since 2013. However, the results were mixed, with original estimates of $20 million annually in tax revenues reportedly falling far short of the mark. A renewed push toward charging for online purchases took place last June, when lawmakers discussed a tax reform that would replace the sales & use tax with a value-added tax system, but the effort was largely ineffective.

Other U.S. jurisdictions have also had difficulties enforcing tax collection on online retailers, especially in cases where the retailer in question does not have a physical presence in the jurisdiction. Combined with that, experts have said that Puerto Rico’s Treasury Department is woefully underprepared to carry out an overhaul of its local tax system, much less attempt to police the vast online wilderness.

No matter the cause, subsequent attempts to secure tax revenues from e-commerce outlets may prove to be a case of too little, too late. “Two years ago, we conveyed our message to the local government administration, specifically the Senate, but they did not listen,” said ICSC’s Oliveras. “I think that at this juncture, it would be fair to say ‘I told you so.’”

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