View from New York: States at war over a tax dodge

THE ARRIVAL of the season of goodwill has not had much of an effect on relations between the states of New York and New Jersey, which are in the middle of a war of words started by a campaign to persuade New Yorkers to do their Christmas shopping in the neighbouring state.

The New Jersey shoreline runs parallel to the west side of Manhattan, just over the Hudson River. The incentive on offer to anyone willing to cross the river is lower sales taxes.

Until recently the sales tax differential of 6 per cent against 8.25 per cent was too small to make most shopping expeditions worthwhile, although New York does tax many items of clothing that are exempt in New Jersey. But New Jersey recently slashed sales taxes to 3 per cent in its new urban enterprise zones in areas close to New York such as Jersey City and Elizabeth.

Ikea, the Scandinavian furniture retailer, has taken advantage of the situation by advertising on New York subway trains, inviting shoppers to come over to Elizabeth and save on their taxes. This has attracted the attention of the New York tax authorities.

'You don't save on your taxes unless you choose not to comply with the tax laws,' notes Karl Felsen, a spokesman for the New York State Department of Taxation and Finance. When New Yorkers shop out of state they are required to file a tax return making up the sales tax difference. 'It is unethical for New Jersey to base competition on promoting tax evasion,' he says.

Up to now most New Yorkers have either not known about the law or have chosen to ignore it. Routine audits are conducted by the tax office, which has traditionally sent out tax forms to consumers found purchasing expensive items such as jewellery, furs or computers. But all the publicity generated by Ikea may herald the beginning of stricter enforcement. The New York tax authorities have recently posted lookouts in the Ikea car park in Elizabeth and at other New Jersey shopping malls, compiling lists of cars with New York State number plates.

The tax office plans to write to the car owners - and it won't be a Christmas card. They will be politely reminded about the tax laws. The programme goes under the title of 'expanding the educational efforts' of the Tax Department, but many shoppers have expressed outrage at the policy.

Steven Vitoff, a spokesman for the New York State Office of Economic Development, notes that there is an agreement between authorities in the two states not to use negative advertising in each other's promotional work. The Ikea advertisements, which were approved by New Jersey officials, violate this agreement. New York will fight back, he vows, but the state 'is trying to take the high road and not descend into the gutter of interstate warfare'.

Car-theft capital

Earlier this week, James Wetzler, New York State tax commissioner, sounded as if he might be veering from the high road when he reminded would-be shoppers that New Jersey - and particularly some enterprise-zone areas close to New York City - is the car-theft capital of America.

Shoppers should be careful that their cars, loaded with Christmas presents, don't become part of the stolen car statistics, Mr Wetzler warned, conjuring up a disturbing image of rampant lawlessness only a few miles from the peace and tranquility of New York City.

The sales tax controversy is the latest development in a long-standing battle between the two states, both of which are trying to shore up their tax bases by promoting business development. Earlier this year New Jersey made a bid to relocate the New York Mercantile Exchange. In the end, Nymex decided to stay in Manhattan after being offered a support package by state and city authorities estimated at around dollars 75m.

But with the retail sector nationwide trying to recover from two dismal years of recession, the two-pronged attack on New York's sales tax revenue and its taxes on retail sector profits is viewed as especially unwelcome.

The recession saw two of New York's best-known department stores filing for bankruptcy. Bloomingdales' parent, Federated Department Stores, re-emerged from Chapter 11 bankruptcy protection earlier this year, and the Christmas season gives it an opportunity to continue its progress after cutting overheads and reducing debts.

A few miles south in mid-Manhattan is the flagship store of RH Macy, which remains in Chapter 11 after buckling under the weight of debts associated with its 1986 leveraged buyout. The success or failure of the current shopping season will be crucial in determining how soon Macy's is able to come out of Chapter 11.

Meanwhile Tiffany & Co, the famous Fifth Avenue jewellery retailer, recently reported profits of only dollars 56,000 for the third quarter. Now it is looking to New Yorkers to give it a strong Christmas season.

The few shopping days left between now and 25 December are more crucial than ever. Many retailers generate 50 per cent of all their profits during the Christmas rush and are hoping that a widespread feeling that the recession is finally over will feed through into consumer spending.

Still cautious

But consumers may choose to remain cautious. Just as corporate America deleveraged after the excesses of the 1980s, so American consumers have been doing their own personal deleveraging, and they may not wish to return to the free-spending ways of the 1980s.

Consumer instalment debt as a percentage of disposable income, which ran at over 18.5 per cent in the late 1980s, has now dropped to around 16.5 per cent. So there is room for consumers to take on additional debt if they want to, but retailing analysts at Salomon Brothers expect conservative spending patterns to last well beyond the end of the current economic sluggishness.

They point to a 'renewed thriftiness' among American consumers, partly influenced by falling house prices that make people feel poorer. Many retailers appear to agree, and have taken conservative inventory positions for this Christmas, having been burned last year by being over-optimistic.

But this time around many retailers are in a stronger position, having cut costs over the past year and invested in computerised inventory control systems to increase efficiency. Low interest rates have also helped. With these factors in mind, Salomon Brothers believes that retailers may be in for their best Christmas selling season since 1988.

And over in at Ikea in Elizabeth, the store manager, Peter Connelly, sounds an equally optimistic note, despite the taxmen lurking outside in his car park. 'Everything went up right after the election,' he says. 'In ten years in the retailing business I've never seen such a turnaround.'

(Photograph omitted)