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Wayfair Ruling, Proposed Postage Increase Undermine E-Commerce

July 12, 2018

Requiring the United States Postal Services (USPS) to increase shipping rates for package deliveries would add to the already increasing burden on consumers and small business owners caused by the U.S. Supreme Court’s Wayfair decision.

Requiring the United States Postal Services (USPS) to increase shipping rates for package deliveries would add to the already increasing burden on consumers and small business owners caused by the U.S. Supreme Court’s decision to allow states to demand sales taxes from out-of-state businesses.

Internet retailer Amazon.com has been the main target of the rate hike demands, based on the claim USPS loses money for every Amazon package it delivers. The story, however, is more complicated. Because a mail carrier is required to come to every address, the incremental costs of carrying an Amazon package to the door with other mail is low, whereas the incremental revenue gained by the USPS is quite high. Add to this the fact that Amazon does a lot of presorting work which reduces the burden on the USPS, plus the volume Amazon offers the USPS, it is a win-win situation.

Evolving Remote Commerce

In the late 1800s, Sears Roebuck distributed millions of mail-order catalogs to a largely rural and widely dispersed American population. Consumers ordered millions of items through the mail, freeing themselves from the high prices and limited availability that characterized local markets at the time. Starting after World War II, shopping malls provided another option, bolstered by increasingly concentrated population centers and the ubiquity of the automobile in American life.

Since the 1970s, companies such as Walmart and Target have offered one-stop shopping for basics from groceries to clothing to furniture, filling a niche in smaller markets where shopping malls do not make economic sense. E-commerce, pioneered by eBay and Amazon, is the latest step in this evolution, allowing retailers to offer maximum variety and low prices.

Although brick-and-mortar stores still account for most retail sales, e-commerce’s share of the market has been growing steadily, from about 8 percent in 2011 to 13 percent in 2017, comprising $453 billion of the $3.5 trillion in retail sales last year. Amazon.com has led the e-commerce pack, accounting for nearly 45 percent of all sales.

Wayfair Burden

A new threat to prosperity that should concern all business owners and consumers is the U.S. Supreme Court’s June 21 decision in Wayfair v. South Dakota.

Since the 1990s, state governments have had to demonstrate a business had a physical presence in the state before demanding the company remit sales taxes. Now, states can tax out-of-state retailers, placing an especially crippling burden on smaller e-commerce retailers.

In order to collect the sales tax, those businesses will face an accounting nightmare and have to hire people or services to calculate and remit taxes on each sale based on each state’s tax code and countless local taxes.

Going Postal

USPS holds a legal monopoly on the delivery of first- and third-class mail and enjoys other government-granted privileges, such as tax-exempt status. It also offers services, mainly package delivery, that compete with private companies.

Despite these advantages, USPS has been losing money for decades. For fiscal year 2016–2017, USPS’ spending exceeded its revenue by $2.7 billion. The postal service has operated at a loss for 11 consecutive years and counting.

One area in which USPS’ services have been in demand is parcel delivery. In 2017, USPS’ revenue from shipping and packages exceeded $19.5 billion, up from $17.4 billion in 2016, accounting for 27 percent of the postal service’s revenue. By contrast, revenues from first-class mail fell from $27.5 billion to $25.6 billion.

Killing the Golden Goose

Raising postal rates would make small business owners and everyday people pay more, delivering another blow to USPS’ operations.

By law, USPS’ prices for delivering packages must cover all its actual direct costs and then some, in order to avoid competing unfairly with private competitors and squeezing them out of the market. USPS is also required to cover an appropriate share of its overhead costs of package delivery: the share of facilities, employees, etc. the postal service must pay for regardless of the number of packages it delivers.

The Postal Regulatory Commission (PRC), an independent agency tasked with overseeing USPS, has certified, as it is required to do by law, that the postal service covers all of its package delivery costs and is not giving unfair discounts to shippers.

A private competitor to USPS’ delivery services challenged PRC’s approach, in the court case United Parcel Service v. Postal Rate Commission. In that case, the U.S. Court of Appeals for the District of Columbia ruled on May 22, 2018 that PRC’s calculations methods were in accordance with its mandate and by those calculations, USPS was not undercutting other delivery companies.

There are serious questions about the future of the postal service. Shipping packages, however, is one of the few USPS services that is not floundering and bleeding money. In fact, it generates net revenue for the postal service.

The Price of Policy

Coupled with the Wayfair decision, raising delivery prices to spite Amazon would be a one-two punch to small business owners and their customers.

E-commerce has revolutionized the U.S. economy over the last few decades, providing access to an almost unlimited variety of goods and giving small enterprises an opportunity to expand their customer base nationwide.

Instead of increasing the costs and difficulty of commerce, lawmakers should seek to reduce the burdens government places on small business owners and consumers and promote economic growth instead.

Author
Edward Hudgins is the research director for The Heartland Institute.
ehudgins@heartland.org @DrEdwardHudgins

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