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State digital ad tax could kill small businesses

Connecticut retailers are in a new era — the post-COVID era. Whether you are a small independent retailer, a mid-size retailer, or a multi-state retailer, the name of the game for survival in today’s digital economy is meeting customers where they are.

More often than not, communication with prospective customers — and even returning customers — is driven by online communication, in the form of digital advertising. Nearly every hour of every day, the people that retailers need to reach to stay in business are online, using mobile devices, tablets, or pc’s, making decisions on where to make their next purchase.

While in many ways this is a new era for retailers, some things never change. Retailers have always had to know their customers well, so that they can serve them better. That is more important than ever today. Any retailer — whether small, mid-size or large — regardless of the segment of the retail industry that they’re in, must respond to that. It’s where the rubber meets the road.

As a result, retailers have had to leverage new technologies and platforms that now dominate customer communication, to meet customer expectations for a personalized and seamless experience between mobile, online, and in-store shopping.

That is why retail businesses all across Connecticut are filled with concern about the new tax on digital advertising that the state legislature is now considering. Proponents of the new tax say they are targeting the digital behemoths — the Facebooks and Googles of the world. The plan is to tax their digital ads in Connecticut.

We should be under no illusion, however, that the tech companies will passively absorb the costs of such a tax. Instead, they will push those costs down to the individual businesses buying those digital ads. No matter the intent of the proponents, the impact will be felt by Connecticut retailers every time they purchase a digital ad on those platforms.

Retailer’s advertising costs will increase, which means they will either raise prices to consumers to cover those new costs, or — just as unpalatable an alternative — do less advertising, reach fewer customers, experience a drop in sales, and have a tougher time balancing their books to stay in business.

What is aimed at the industry giants will find its way onto invoices in the accounts payable departments of Connecticut’s retail businesses. And the timing could not be worse.

The impact that COVID has had on the retail industry cannot be overstated. Suddenly and without warning, thousands of retail businesses had to adjust. For many, that meant shutting their doors, for weeks or months. For nearly all, it meant retooling business models on the fly, trying desperately to hold on to some segment of an existing customer base to retain employees, pay rent and utility bills, and serve customers.

Retail businesses have had little choice but to advertise on the digital platforms that would be the best — or even the only — effective way to reach customers. Because that’s where everyone is — looking at and depending on the exact same sites that the legislature is now targeting for a new tax. The transition from traditional to digital advertising has accelerated, and it is widely recognized that the advertising landscape is not likely to change, post-COVID.

Retail businesses are an indispensable segment of the Connecticut economy, providing good jobs for Connecticut families. There are roughly 42,000 retail establishments in Connecticut, supporting more than 470,000 jobs and contributing more than $34 billion to our state’s economy. More than 98% of retail companies are small businesses, employing fewer than 50 people.

The COVID-19 economy has put retail businesses, particularly small independent retailers, under increasing pressure just to stay in business — and to stay in business here in Connecticut. If this proposed tax were to pass, it may prove to be the final straw for retailers who have been teetering on the brink for months. For third or fourth generation local retail businesses to entrepreneurial start-ups, the added costs may be too much to bear.

The digital advertising tax may have seemed like a good idea, a way to grab some money for Connecticut from the global tech giants. But the law of unintended consequences being what it is, our own retail businesses and consumers will be harmed most.

Tim Phelan is president of the Connecticut Retail Merchants Association. Robin and her husband, Jim Mallove, own Mallove's Jewelers, a multi-generation family-owned business founded in New London in 1919, now with locations in Waterford and Mystic.

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