In this issue:
Lone Star Card Helps Shrink Food Stamp Rolls
JOHN SHARP Column: EBT Lives up to High Hopes
Cleaning up on Coupons
How Many Doughnuts Today?
Traveling to the Table
School Review Team Shifts Focus to Houston
Cybercash on the Barrel Head
Supermarkets compete to serve consumers' changing tastes
Everyone eats. Maybe that's why the grocery business is one of the largest in Texas. The state's 7,400+ grocery stores reported gross sales of $23 billion in 1994.
The earliest written records of the food trade date back to ancient Rome and Athens. In America, the food trade began at frontier trading posts. Much has changed since then, and several Texas companies have been leaders in the evolution of the American grocery business.
Although grocery stores earn substantial profits from their huge volume of sales, their net profit margin is one of the lowest-slightly more than 2 percent, according to Dun & Bradstreet. Therefore, these stores compete aggressively for the largest possible share of the food market.
Seeking a competitive edge, grocers are expanding the size of their stores. Older stores typically contain about 35,000 square feet, whereas many new stores contain 70,000 square feet or more. Competition is also responsible for the growing diversity of items and services now available at grocery stores.
Homegrown stores: In 1994, Forbes magazine ranked San Antonio-based H-E-B Grocery as the nation's 20th largest private company. H-E-B began in 1905 as a small "staple and fancy grocery" store in Kerrville and today has 230 stores in more than 100 communities, employing some 42,000 Texans and ringing up nearly $5 billion in annual sales. H-E-B's innovative Central Market in Austin has become a model for grocery stores across the nation. The company has opened smaller Pantry stores in the Houston area and, in December 1995, broke ground for its first store south of the border in a suburb of Monterrey, Mexico.
Houston-based Randall's Food Markets, founded in 1966, now has more than 120 stores around Texas, many as the result of acquiring the Dallas-based Cullum Co. (Tom Thumb). The company employs some 20,000 Texans and generates more than $2 billion in annual sales.
Minyard Food Stores, based in Coppell with 81 stores around Texas, is the sixth largest female-owned business in the country, according to Working Woman magazine. Houston- based Fiesta Mart, which opened its first store in 1972 and now has 33 stores statewide, has an international flair focusing on ethnic foods. Brookshire Grocery Co., based in Tyler, operates 80 Brookshire's and Super 1 Foods stores in Texas and recently purchased 12 stores from Thrift Mart. In 1994, revenues for these three chains ranged from $675 million to $811 million each.
Ohio-based Kroger, the nation's largest retail grocery chain, and Idaho-based Albertson's also have a considerable presence in Texas.
Fruits of competition: As shoppers become more price- conscious, grocery stores are pressured to offer good service as well as good value. Many stores now offer a vast array of convenience sections-delicatessens, bakeries, restaurants, coffee bars, sushi counters, video rentals, film developing, entertainment tickets, floral shops, pharmacies and banking. Stores are always looking to remodel, expand or open new stores to meet consumers' needs.
Attention to customer preferences is changing the way supermarkets manage and distribute their inventories. Many stores are adopting a process known as Efficient Consumer Response, in which they integrate promotional planning and consumer forecasts to match inventories more closely with consumer demand.
"Everyday low pricing" is common among chain stores today, but even stores using this approach offer specials to appeal to shoppers. Grocers use promotions to increase sales, traffic and customer loyalty. Common promotions include "buy one, get one free," discounted dishes, towels or encyclopedia sets, drawings for free trips and tie-ins to events like the upcoming Olympic Games. Many promotions require subsequent visits for shoppers to complete the set of a particular item.
Rise of private brands: Always trying to find the best product for the price, shoppers are not as loyal to national brands as they once were. Nationwide, private label or store brands account for $30 billion of grocery sales annually. Industry experts predict that by 2000, private labels will capture one-third of sales.
Private labels have improved over the past few years, according to Grocery Marketing magazine, to the point where their product and packaging quality is as good as or better than that of branded products costing up to 50 percent more. Private label products are priced lower because they do not bear the burden of high advertising costs. Recent additions to this group include frozen dinners, egg substitutes and cookie dough, though the best selling private label products are still staples like milk, cheese and sugar.
Private label brands have been good for consumers in another way: They have forced standard brands to keep their prices low. Consumer products giant Procter & Gamble says it plans to rein in spending on advertising, coupon promotions and other marketing activities to enable the firm to lower prices on its products, the better to compete with generic brands.
Exotic and specialty foods: Foods you've never heard of today may be staples tomorrow. When Frieda's, a California- based specialty foods company, introduced kiwi fruit to the U.S. market in 1962, no one knew what it was or what to do with it; now it is found in almost every grocery store. The fiery habanero chile pepper, introduced in 1988, has become nearly as common as the jalapeno.
Today's shoppers seem increasingly willing to try new foods. A survey by The Packer, a produce trade journal, found that in 1994, 24 percent of consumers bought one or more fruits for the first time, up from 21 percent in 1992. Shoppers most often buy a new item because a friend recommends it or a family member requests it.
Many foods considered exotic are actually common among certain ethnic groups. For example, nopalitos (cactus leaves) and jicama are familiar to Hispanic consumers, and arugula has been a favorite of New York Italian families for years. Soon, perhaps cherimoya, portabella and radicchio will be household words.
Health focus: Health concerns have made consumers increasingly picky about what they eat. Although organic foods accounted for less than 2 percent of U.S. grocery sales in 1993, sales of these foods have soared to $2 billion per year, up from $178 million in 1980. About 6 percent of all new foods and beverages introduced each year are organic.
In 1990, the federal government established specific standards for producers of organic foods. To receive the "organic" label, a product must be grown without toxic fertilizers, insecticides, fungicides, herbicides or soil additives. Organic meat must be produced by feeding animals only organic feed-no antibiotics, growth hormones or synthetic additives. Products may receive a "transitional" certification during a period of three years from the last date of application of a prohibited material.
Sales of reduced-fat foods also are growing fast. Manufacturers have responded by making new tasty, healthy foods and by reducing calories and fat in popular, good- tasting foods. Similarly, products low in sugar are no longer found only in the diet section of the grocery store.
Pork and beef producers are reducing the amount of fat in their products as consumers seek to lower their fat intake. U.S. Department of Agriculture statistics show that chicken consumption in the U.S. has climbed from about 36 pounds per person in 1985 to 50 pounds in 1995, while beef consumption has dropped from 75 pounds to 64 pounds; per-capita pork consumption has held steady at about 49 pounds. Americans are eating more vegetables and fruit than before.
Manufacturers are trying to make produce more convenient by offering fruits and vegetables that are already washed, cut and peeled.
Megastore trend: The supercenter concept combines general merchandise and groceries under one roof. These stores average more than 150,000 square feet, with about one- third of the space dedicated to grocery items. Supercenter shoppers generally focus on convenience, good selection and low prices. A typical supercenter generates revenues of $50 million per year.
When a supercenter comes to town, it can signal the closing of smaller grocery stores. However, a survey by DSR Marketing Systems of Deerfield, Ill., has found that supercenters capture an average of only 9-11 percent of all grocery sales, and that only 30 percent of shoppers use supercenters as their primary source of groceries.
The best way for smaller grocers to compete with a new megastore may be to provide the best possible selection and presentation of fresh foods, which have been the weak spot of many supercenters. According to Progressive Grocer magazine, many store owners believe that both chain and independent grocers have had to improve their merchandising and operations in order to compete with supercenters.
New technology: As the grocery business moves into the computer age, stores that are not able to afford new technologies will find it more and more difficult to compete with those that can.
In Denton, Kroger is testing home shopping services for 200 subscribers of the Interactive Channel, with delivery provided by Shoppers Express. Subscribers at home may enter their zip code and visually scan the inventory of the closest Kroger store. Beginning in late 1994, Kroger teamed up with America Online to offer Kroger products throughout the Dallas/Fort Worth area. In the coming years, shoppers will use computers for menu planning and nutritional guidance as well.
H-E-B began testing the use of electronic shelf labels as early as 1985. This technology uses high-frequency radio waves to transmit pricing data to the shelf label, which can be programmed to give shoppers additional product information. The system supports price accuracy and expedites price changes, because information in the shelf tags is drawn from the same database used at the point-of- sale terminals. H-E-B continues to evaluate the system in nine stores around Texas.
Radio wave technology also may be used in the future to create a "magic tunnel" through which shoppers would push their grocery carts, enabling all items to be tallied without the use of scanning or bar codes. Although this technology is available today, it is not yet cost-effective.
Shoppers are using debit and "smart" cards to a greater extent. Smart cards contain microcomputer processors capable of storing large quantities of data. Many stores already accept credit and debit cards as a necessity to compete. Texas' electronic benefits transfer program (Lone Star Card), first proposed by Comptroller Sharp, uses debit technology to replace public assistance checks and food stamps.
The first grocery scanning device was installed in 1974 in Troy, Ohio, and this technology continues to make inroads into supermarkets. Now, innovative companies are testing handheld devices that allow customers to scan their own groceries, either while they shop or at the checkout counter.
In the future, supermarkets may adopt biorecognition techniques such as fingerprint identification or voice recognition. Customers would no longer have to show identification, provide signatures or use personal identification numbers when cashing checks or making debit or credit transactions.
Looking ahead: Innovations in customer service are essential for supermarkets to survive the competition for the American food dollar. Store owners face challenges not only from their direct competitors-other supermarkets-but also from the long-term changes in Americans' eating habits.
Americans now spend about 45 cents of each food dollar away from home, according to a study by Andersen Consulting cited in Supermarket News. A survey by A.C. Nielsen shows that in 1990, Americans spent an average of 30 minutes per day preparing meals, but by 2000, this will fall to only 15 minutes.
To compete with fast-food restaurants, many supermarkets have begun offering takeout meal counters with ready-to-eat food. Takeout counters offer the convenience and selection of restaurant-quality food at a lower price.
The supermarket business has begun consolidating as other industries have done. Several large grocery chains outside of Texas have gone bankrupt in the past two years and others are restructuring. In 1984, an average of 10,300 grocery stores reported sales tax collections to the Comptroller's Office; by 1994, that number had dropped to 7,500. According to Andersen Consulting, more than one-fifth of the nation's 30,000 existing supermarkets could disappear within the next five years.
Contributing to this article:
JOHN SHARP Column:
EBT Lives Up to High Hopes
Back in 1991, when this agency's Texas Performance Review first proposed the idea of an electronic benefits transfer (EBT) system to serve public assistance clients statewide, we foresaw that this new technology could save taxpayers a pile of money by delivering benefits more efficiently and by reducing fraud and abuse.
Today, Texas' groundbreaking EBT system is operating in all 254 counties. And the early results have justified our high hopes for this program, which has provided some benefits we didn't expect.
Replacing paper food stamp coupons with the Lone Star Card throughout the state has helped Texas lead the nation in reducing food stamp rolls, as documented in the article on page 3.
The automated EBT system weeds out people who shouldn't be on the food stamp rolls in the first place. When EBT went on-line in Houston in February 1995, some 30,000 recipients dropped off the rolls immediately. Some of these people had been receiving food stamps at two or three different addresses; others were receiving stamps originally mailed to somebody else. They could easily sell the stamps for cash on the underground market. Now they can't do that.
Grocers have strongly supported this program. The Lone Star Card has boosted grocery sales across the state by more than $1 million per day because more food aid recipients are using their benefits as intended.
While Texas is one of only three states that have implemented full-scale EBT programs-the others are Maryland and New Mexico, whose public assistance rolls are dwarfed by Texas'-nearly half of the states are working to put EBT in place. They will be able to "go to school" on our signal success.
Lone Star Card Helps
Shrink Food Stamp Rolls
One year after the innovative Lone Star Card debuted in Harris County, Texas is leading the nation in reducing food stamp rolls. While the economy is a factor, the Lone Star Card also deserves credit. The electronic benefits transfer (EBT) program, first proposed by Comptroller Sharp's Texas Performance Review in 1991, has given the state a clear advantage in making its food stamp program more efficient and fraud-free.
Operating statewide since November 1995, the card delivers benefits to more than 2 million food stamp recipients.
According to the U.S. Department of Agriculture, national food stamp rolls fell by more than 1 million recipients during the first 10 months of 1995. Texas accounted for nearly one-fifth of that drop, even though the state had just under one-tenth of all food stamp recipients nationwide at the beginning of the year.
Between January and October 1995, Texas' food stamp rolls shrank by nearly 200,000 recipients. This decline was more than double that of New York, which resembles Texas in population and the size of its food stamp program. In the same period, California, which has the nation's largest food stamp program, added 43,300 recipients.
More than two-thirds of the decline in Texas occurred in the Houston area, where the Lone Star Card went on-line in February 1995, and in the Dallas-Fort Worth area, where it has been operating since June.
With EBT, food stamp coupon authorizations no longer are mailed to the wrong address, where thieves who raid mailboxes used to treat them like ready cash.
The Lone Star Card documents all transactions on each account, streamlining the accounting process for grocers and bankers and enabling law enforcement authorities to track the illegal use of benefits. Texas House Speaker Pete Laney said: "The new card is making criminals think twice about trying to rip off the food stamp program-and the taxpayers who support it."
Approximately one-fourth of the food stamp recipients in Texas also qualify for Aid to Families with Dependent Children (AFDC) and receive monthly cash payments under that program. As a condition for granting Texas the necessary waivers to operate the EBT program, federal regulators also required Texas to administer AFDC cash benefits through the Lone Star Card. No cash changes hands, however, on the food stamp program.
Grocers have reported an increase in food stamp purchases even as the number of participants has dropped. "Those dishonest clients who never used their benefits in grocery stores to begin with have now been weeded out of the system," said Joe Williams, executive director of the Gulf Coast Grocery Association of Texas.
In Houston, after the Lone Star Card went on-line, food stamp sales rose by $4.5 million dollars from one month to the next, even though comparable benefits were issued for both months. In Dallas-Fort Worth, sales rose by $5.7 million from one month to the next as illegal trafficking of benefits decreased.
Lieutenant Governor Bob Bullock praised the program in these words: "Texas has been at the forefront in bringing accountability and responsibility to its welfare system. The successful implementation of the Lone Star Card to streamline the delivery of services to those in need and to reduce welfare fraud has played an invaluable role in the transformation."
Contributing to this article:
Annette LoVoi and Dave Cummings
C.W. Post issued the first cents-off coupon in 1895-a one- cent certificate for Grape Nuts cereal. Since then, coupons have become a mainstay of the American grocery shopper. These days, businesses on the Texas-Mexico border process many of the coupons used by shoppers around the nation.
In 1994, U.S. manufacturers distributed 310 billion coupons valued at $10 billion. Although only about 2 percent of coupons are redeemed in stores each year, coupon issuers show few signs of slowing down. Manufacturers use coupons to introduce new products, call attention to new packaging or sizes, soften the blow of a price increase or reward loyal customers. According to Dun & Bradstreet's Nielsen Clearing House Promotional Services (NCH), coupons saved shoppers $4 billion in 1994.
NCH is the largest company of its type in the world. Headquartered near Chicago, NCH operates its largest clearing house facilities in El Paso and Juarez.
Texas is home to United Coupon Clearing House, which began operations in 1964 and is now the nation's third largest clearing house. The corporate office is in Lubbock, but the receiving office is in Del Rio and the processing office is a maquiladora in Muzquizo, Mexico. Carolina Marketing Services (CMS) and Indiana Processing have operations in Del Rio and Ciudad Acu-a. The CMS plant is the largest, processing about 40 million coupons per week.
Processing redeemed coupons is a lengthy task. Because coupons are not standardized (size, expiration date, bar codes), they must be sorted and bundled by hand. Typically, coupons arrive at a clearing warehouse on the Texas side of the border and are shipped to Mexico for sorting because labor costs are cheaper there.
Research by CMS indicates that the average American coupon-clipper spends 25 minutes a week searching for, sorting and clipping coupons. A survey by NCH reveals that more than 65 percent of consumers use coupons regularly, and 50 percent shop at stores that offer to double or triple the value of the coupons. Although half of all coupon users say they resent the time needed to clip, only one out of every eight consumers doesn't clip coupons at all.
In the future, coupons will be available on-line through the Internet. Distributing coupons this way should be more efficient and may help to reduce coupon fraud. Manufacturers have become frustrated by small supermarkets that submit large amounts of coupons for products they haven't sold. This type of fraud has made it more difficult for honest grocers to receive reimbursement for the coupons they submit.
Coupon issuers are making it tougher on clippers. Today the average coupon is good for only three months, about half as long as five years ago. The coupon with no expiration date is very rare. Shoppers can expect to save more with coupons for cereal, coffee, soft drinks, pet food, cold medicines and detergent. In general, the costlier the product, the larger the value of the coupon. To encourage coupon usage, Albertson's has been attaching coupons directly to certain targeted products.
Actmedia, a subsidiary of Dallas-based Heritage Media Corp., began dispensing coupons in stores in 1992, using compact instant coupon machines equipped with blinking lights. These shelf-mounted electronic dispensers are now used in 14,000 supermarkets around the country. Redemption rates for coupons distributed in-store are higher than those for regular coupons found in the Sunday newspaper-18 percent compared to 3 percent.
Customers are often confused about which items in a grocery or convenience store are subject to sales tax and which are not. That's understandable because the Texas Tax Code is fairly complex in this area.
As a general rule, food purchased for preparation and consumption elsewhere is not taxable. Stores must collect tax, however, on beer, wine, soft drinks, diluted juices, flavored or carbonated water, candy, candy-coated nuts and popsicles.
Almost all non-food items are subject to sales tax, as are services such as photo processing and video rentals. Newspapers are not taxable, though magazines are.
If the store has a bakery, coffee shop or deli with a place to sit and eat-in effect, an in-store "restaurant"-the store must collect sales tax on all food kept hot and on individual-sized portions of food sold with utensils. Doughnuts and cookies are taxable when sold in quantities of five or fewer. Ice cream sundries are taxable when sold individually, but not when sold in packages of six or more. Sandwiches sold fresh are taxable but frozen sandwiches are not.
If a customer uses a discount coupon when buying a taxable item, the grocer subtracts the value of the coupon from the item's sale price and collects tax on the lower price. Items legally purchased with food stamps-or with the new Lone Star Card, now that Texas' electronic benefits transfer program has replaced paper food stamps throughout the state-are exempt from sales tax.
The Comptroller's tax records indicate that in 1994, Texas' grocery and convenience stores rang up gross sales of $29.8 billion. Of that total, $9.8 billion was subject to sales tax, generating roughly $613 million for state coffers.
Grocers who are unsure if they should collect sales tax on a specific item should call the Comptroller's toll-free number, 1-800-252-5555, for assistance.
Traveling to the Table
Convenience and rising incomes drive Texas restaurant sales
Most Texas households cannot afford a live-in chef, but they can afford to avoid cooking-so they eat out. Sales at Texas restaurants have risen by nearly one-third over the past five years, while restaurant employment has climbed 16 percent.
Each week, more than 65 million customers are served at Texas restaurants, which dish out more than 3.4 billion meals annually, according to the Texas Restaurant Association (TRA). Texans spend 43 percent of their total food budget dining out, paying an average of about $5.35 per meal.
While food preferences and restaurant styles come and go, the industry isn't slowing down. In 1994, sales at Texas' 37,300 restaurants topped $16 billion. More than 500,000 people worked in Texas eating and drinking establishments, and wages totaled $1.3 billion, according to the Texas Employment Commission. These businesses generated roughly $890 million in state sales taxes.
More than 7 million Americans worked in eating and drinking places in 1994, and labor analysts expect the number to grow at a steady rate of 2 percent per year through 2005. Industry growth in 1994 and 1995 was the strongest since the late 1980s, according to the National Restaurant Association (NRA).
Though sales continue to expand, a few hard rules don't change. Saturday is the most popular day to eat out, followed by Friday and Sunday, according to the NRA. Men eat out more often than women. As income rises, consumers eat out more often and spend a greater proportion of their food dollar on meals away from home.
Entertaining meals: In small-town Texas, Dairy Queen (based in Minneapolis) is very popular. More than 800 of DQ's red-and-white icons dot the state. To many seniors and families, however, the dining-out sign says Luby's, Wyatt's or Furr's. These three cafeteria chains are all headquartered in Texas. The popular Highland Park Cafeteria in Dallas was founded in 1925. Celebrity chefs, lengthy full-course meals, unique fare ranging from fried alligator to rattlesnake to pickled cactus and award-winning Texas wines contribute to what has become for many Texans an afternoon or evening of entertainment in itself.
A profile of this industry offers examples of both small businesses and multimillion-dollar corporations. Texas restaurants averaged less than $500,000 each in sales in 1994, and though the state is dominated by independent operators, multi-unit restaurant companies account for 61 percent of industry sales, according to TRA.
The restaurant industry took a 3 percent slice of the $471 billion gross state product pie in 1994. In comparison, agriculture accounted for roughly 2 percent, oil and gas for 6 percent and construction for 3 percent. The Texas restaurant job force of 500,000 compares to 580,000 employed in health services, 395,000 in construction, 240,000 in food stores and 150,000 in the oil and gas industry.
In 1995, an NRA analysis showed Texas pulling ahead of Florida to become the nation's second largest food service market behind California. The fastest growing markets for restaurant sales in Texas, according to TRA, are McAllen- Pharr-Edinburg, Brownsville-Harlingen, Waco, Wichita Falls, Corpus Christi, Tyler, Killeen-Temple, Lubbock, Austin and Abilene.
Hamburger all the way: Hamburger restaurants are the most popular type of eating establishment in Texas with $2.6 billion in sales in 1994. This compares to $1.7 billion in Mexican food restaurant sales and $1 billion in pizza restaurant sales.
Texas' 4,845 cafes and diners rang up more than $1.5 billion in sales, nearly 10 percent of the 1994 total. In rural Texas, at least one cafe or diner on the town square is standard throughout the state. Texas' 1,350 chicken restaurants reported $805 million in sales in 1994. Steak houses, seafood restaurants and cafeterias equally divided about $1.7 billion in sales.
According to NRA studies, men are more likely to eat at restaurants that serve meals costing $10 or more; 12 percent of men eat at these restaurants more than once a week, compared with 5 percent of women. As they grow older, men are more likely to eat at under-$10-per-meal establishments. In addition, consumers taking their meals "to go" account for almost half of restaurant traffic, and nearly half of all adults in the U.S. dined at a restaurant on a typical day during 1993.
Hold the pickle and lettuce: Fast food-especially the burger-and-fries-to-go genre-is driving the growth of the dining-out industry. Quick-service restaurants account for 35 percent of Texas' total restaurant sales and provide the first job for many teen-agers.
Fast food has been one of the fastest growing industries in the U.S., capturing a growing share of food budgets over the past 20 years. Such growth reflects greater spending power, the rise of the one-person household and more women in the work force. The U.S. quick-service restaurant industry now exceeds 100,000 outlets and $80 billion in annual sales. Texas' fast food restaurants recorded $5.6 billion in sales in 1994, according to figures compiled by the Comptroller's Office and TRA.
Fast food restaurants employ more than 2.3 million workers in the U.S. These workers are predominantly teen- agers who work part-time for less than a year and whose earnings are tied closely to the minimum wage. Nearly 70 percent of employees are 20 years or younger, and the average work week is 29.5 hours. Nearly two-thirds of the fast food work force is female.
In other countries, fast food sales account for about 10 percent of restaurant sales, but that share is growing as U.S. fast food corporations expand overseas.
Kids call the shots: Children are the new food gatekeepers for the family, according to a 1993 study of family dining practices by the University of North Texas. And children exert the greatest influence on restaurant selection when the family chooses an "eat-in" fast food restaurant.
Research shows that the convenience of fast food outweighs all other family dining decision factors, including nutrition. "While respondents were highly educated and with moderate to high incomes, parents relied heavily on fast food restaurants," said another University of North Texas study on dining practices. Parents ranked nutritional selection for children's meals seventh out of 12 restaurant amenities.
High amounts of sodium and fat in meals can contribute to obesity, high blood pressure and other heart/cholesterol- related ailments, according to the U.S. Department of Agriculture. Most nutrition experts advise limiting fat intake to 30 percent of total calories and limiting sodium intake to 2,300 milligrams per day. The fat content of a hamburger and medium order of french fries averages 40-50 percent of total calories, and the sodium averages 1,000 milligrams. By raising the nutritional value and lowering the fat and sodium content of their fare-as many have already done-fast food restaurants could capture and keep a larger share of health-conscious consumers.
In Texas, hamburger take-out accounted for nearly half of all fast food sales in 1994. Texans ate nearly $1 billion worth of quick-service pizza in 1994, and chicken to go was the third preference with a 14 percent share of fast food sales.
The main impetus behind the restaurant industry's impressive growth is the "time famine." In many families, both parents work outside the home and have no time to plan or prepare meals. Regardless of the reason-time shortage, a mode of entertainment or a desire to eat someone else's cooking-Texans eat less at home each year.
Contributing to this article:
Since 1991, Comptroller John Sharp has overseen performance reviews of 21 public school districts in Texas, including the 140,000-student Dallas Independent School District. In April, the Comptroller's Texas School Performance Review team will begin a review of the Houston Independent School District (HISD), the state's largest public school district. HISD is a $1 billion-a-year operation with 21,000 employees serving more than 200,000 students in 250 schools.
The 1995 Legislature directed the Comptroller to analyze the effectiveness and efficiency of HISD's budget and operations. The $750,000 project, encompassing data and records reviews, interviews and public forums, will culminate in a November 1996 report.
After a formal kickoff with Comptroller Sharp, a private consultant team and local officials, the study will apply the principles and lessons of previous school district reviews to pinpoint potential savings and efficiencies.
The review team is likely to address school district organization and management, educational service delivery and performance measures, personnel management, community involvement, facilities and energy management, asset and risk management, budgeting and financial management, management information services, educational technology, purchasing, warehouse and food services, safety, security and transportation.
Underlying the effort will be the Comptroller's standing mandate to find ways to concentrate resources in the classroom rather than in red tape and bureaucracy. After each performance review, the affected district has full control over whether to adopt the Comptroller's recommendations or find a better way of improving services.
Since the inception of school district performance reviews, the Comptroller has not recommended that a single teacher be fired. The reviews have identified potential savings to local taxpayers amounting to nearly $200 million. School districts report having implemented more than 87 percent of the recommendations contained in the reviews, with actual savings of almost $40 million to date.
Readers with suggestions or questions about the HISD performance review or school reviews in general may call the Comptroller's toll-free hotline. Calls are confidential.
Contributing to this article:
Growth of electronic commerce poses problems for state tax collections
Traditionally, the states have levied sales taxes on the sale of tangible goods -shoes or furniture, for example-and the tax base has been easy to define and maintain. Now, with changing business practices and the burgeoning use of electronic commerce, the definition of business and where it takes place-the foundation of sales or business taxation for the states-is growing more fuzzy.
If you buy a pair of hiking boots at the local sporting goods store, in most cases you pay a tax. If you buy the same boots through a catalog by phoning an out-of-state company, or after downloading a catalog from the Internet onto your computer, you might not be charged a tax.
As a result of a U.S. Supreme Court ruling, there is no doubt that a vendor having nexus, or presence, only through the mail or through delivery by common carrier is not required to collect the use tax levied by the state of destination. Many questions remain about the collection of sales and use taxes on goods and services sold over the Internet.
In many states, including Texas, sales and use tax means a transaction tax on goods and some services. But on the Internet, for example, the transaction is not that simple. Where did the sale take place? Where are the profits earned? Is the item purchased a taxable item?
States are struggling to collect needed receipts from the sales and use tax, which in Texas' case brings in more than half of the state's total tax revenue. With rapid growth in interstate sales through the Internet, mail order and television, the collection of sales and use taxes will become increasingly inequitable and unenforceable in the absence of corrective legislation, according to the National Conference of State Legislatures (NCSL). Also, local retailers and out-of-state retailers with a physical presence in taxing states face "a serious competitive disadvantage," NCSL says.
On-line commerce: In the past several years, thousands of businesses wishing to sell goods or services electronically have set up marketing "addresses" on the World Wide Web portion of the Internet, the worldwide system of computer networks.
Estimates of sales over the Internet vary widely. Forrester Research Inc. of Cambridge, Mass., offers a frequently quoted estimate of $240 million of on-line consumer spending in 1994, based on a national survey of merchants, on-line service providers and consumers. The Federal Trade Commission (FTC) estimates that sales transactions worth nearly $3 billion took place through the global information network in 1995, and that sales will reach "tens to hundreds of billions of dollars" in the next decade. Panelists at the 1995 annual meeting of the Multistate Tax Commission anticipated that sales on the Internet will range from $2.4 billion to $7 billion by 2000.
More than 2.5 million people-approximately 14 percent of World Wide Web users-have bought products or services over the Internet, according to an October 1995 survey by CommerceNet and Nielsen Media Research. A study from the Information Sciences Institute at the University of Southern California estimates that more than 10,000 companies offered information and services for sale over the Internet at the end of 1994, and the number of companies is expected to reach 1 million by the turn of the century.
Security concerns have been a major barrier to commerce on the Internet. Individuals who buy goods and services by credit card on the Internet fear that their financial information will not be transmitted securely through what many perceive as an unregulated nether world of information flow. Most likely, the security problem will be solved with some form of "cybercash." (See the article on page 13.)
"Consumers who wish to purchase goods and services on- line are currently faced with several unattractive options," said David Medine, associate director of credit practices with the FTC. "They can risk sending their credit card information off into cyberspace, or they can sign off, contact the merchant by phone or mail and use traditional payment methods such as cash or checks or credit cards.
"All consumers do on-line with any degree of confidence is window shop," Medine continued. "If the global information infrastructure is to achieve its potential as a mechanism for commerce, payment systems must be developed to provide consumers with security."
Virtual vs. physical: The sale of goods and services over the Internet falls into four basic categories: direct selling of products, selling advertising space, charging service fees for information and charging fees for on-line links.
One of the fastest growing yet most elusive sources of potential tax revenue is the "virtual mall." Retailers establish Internet "storefronts" that allow users to browse through catalogs ranging from jewelry to food to software.
In the case of physical retail malls, Texas requires merchants to collect the tax even if they're based out of state. With products purchased at virtual malls and new methods of selling, however, states face new administrative challenges in collecting the tax. Is the "virtual merchant" or the purchaser required to collect/pay the tax?
In Texas, both physical and virtual mall merchants are required to collect the tax if they have a "physical presence" in the state. The definition of physical presence is the crux of the controversy.
Mail sale: The largest and most established form of at- home sales-when the buyer and seller don't meet-is mail order, a $60-$80 billion industry that has roughly doubled since 1987 and shows no signs of slowing.
Tax collection on mail order sales, called one of the core inequities in state taxation, was addressed most recently in the 1992 U.S. Supreme Court decision in Quill Corp. v. State of North Dakota. The court ruled that a company having no substantial nexus in the state, and conducting its business through the mail, is protected from collecting the tax.
Out-of-state mail order sales are estimated to cost the states between $3 billion and $4 billion per year in lost tax revenues. In 1994, Texas' state and local governments lost $235 million because of out-of-state mail order purchases, according to the U.S. Advisory Commission on Intergovernmental Relations.
Mail order companies argue that the absence of a national tax rate hinders the collection of taxes on mail order sales. Neither the states nor local governments have been willing to accept tax rates lower than those collected by in- state vendors.
The seller is not obligated to collect the tax, and the existing system is difficult to enforce. The 1992 Supreme Court ruling does allow states to require companies to provide information concerning their operations if a state believes that the company may have nexus within the state.
Some industry observers believe the explosion of on-line retailing will cause the demise of mail order catalogs because on-line retailing is less expensive for sellers, more engaging for buyers and more conducive to impulse buying. Others disagree, saying paper catalogs still meet needs that electronic media cannot.
Shoppers' networks: The decade-old home shopping industry began with the concept of penetrating the final, most effective retail location: the living room couch. The two primary home shopping television networks, Home Shopping Network (HSN) and QVC, sell about $2 billion in goods annually.
While shopping through TV is popular with individuals accustomed to it-HSN reports that half of its 5 million "active" households make repeat purchases-viewers must wait until they see something they like, rather than being able to browse as they would in a store or catalog. Now, general merchandise stores are planning their own shopping channels with interactive electronic arrangements that would allow the at-home customer to make direct purchases.
HSN and QVC, unlike their mail order and on-line counterparts, collect a tax on merchandise sold in Texas. Although it has no physical presence in Texas, HSN has decided to collect a tax because, in the company's words, it is "not willing to assume the potential liability that could be assessed if Texas were to assert that sufficient presence in Texas existed."
Taxing issue: Whether an out-of-state seller is responsible for collecting the tax on electronic sales of goods and services is a legal issue still in the early stages of discussion. In November 1995, a conference of tax policy experts and business delegates sponsored by the Multistate Tax Commission (MTC) considered whether government can afford to resolve this issue without the cooperation of business and whether business can afford to ignore the application of state taxes to on-line services.
States vary in their approaches to applying the sales tax. For example, while most states tax computer hardware the same way, they may tax software and maintenance contracts differently, creating additional recordkeeping requirements for retailers.
The National Conference of State Legislatures urges federal legislation that would require the collection of sales and use taxes by interstate sellers who solicit business in a taxing state and that would allow states to establish a single statewide tax rate for use by out-of- state retailers.
"Sales tax collection on the Internet is going to be very complicated," said Daniel L. Sullivan, chief executive officer of AVP Systems, a Massachusetts company that designs software that will automatically compute the tax. "Once the states realize the amount of money that's going to be involved in on-line shopping transactions, they'll react. And they may react with a vengeance as they go after taxes."
"Does anyone seriously doubt that current concepts of nexus are outmoded and must be rethought to be applied to electronic commerce?" asked June Sommers, director of the MTC's national nexus program. One example is anonymity in on- line transactions. While security is necessary for the growth of electronic commerce, it muddies the taxability of the transaction.
States are just beginning to wrestle with the implications of electronic retailing. While tax administrators don't want to impede commerce or collect taxes the states don't deserve, they fear that if the tangible tax base evaporates, that will increase the burden on other taxpayers and the stresses on state fiscal systems.
Contributing to this article:
The promise of electronic commerce depends on a reliable, secure system of money. Today's cashless payment comes in many forms, known as cybercash, digital cash, e-cash and "smart" cards.
Generally, there are two types of cybercash: identified and anonymous. Identified cybercash can reveal the person who withdrew money from the bank. Anonymous cybercash works like paper cash: once withdrawn from an account, it leaves no transaction trail. Both forms of cybercash can be transacted either on-line or off-line. On-line means the parties to the transaction interact with a bank; off-line means no bank or financial institution is involved.
A good example of identified, on-line cybercash is the smart card, embedded with a microchip that enables the owner to "load" it with cybercash. When the holder makes a purchase, the smart card is processed through an electronic reader, and funds are transferred from one account to another electronically. Similar to a credit card, identified cybercash enables the bank to track the money as it moves through the economy.
An anonymous, off-line method of electronic payment is the cash card, a simplified smart card. Financial institutions sell cash cards with a stored value, say $40. Each time the card is used, that amount is deducted from the $40. When the card is "empty," the owner may reload it with more money or throw it away.
A computer checkbook best exemplifies identified, off- line cybercash. This type of checkbook enables the user to make payments, similar to writing paper checks, through electronic mail. The "e-check" can contain all the information that paper checks contain, plus a digital signature-a security code proving that the check was authorized by the account holder.
Security is the greatest obstacle to the acceptance of cybercash as a purchasing medium. A 1994 Harris poll revealed that only 28 percent of the public said they were comfortable divulging their credit card numbers to make purchases over the telephone-a familiar, "mature" technology.
Cybercash software designers contend that encryption- scrambling information so it can be read only by people with the proper decoding keys-protects merchant and consumer financial information. One drawback to encryption, however, is getting the necessary software into the hands of a large number of consumers.
Cybercash is more flexible than traditional money, and its administration may wind up costing financial institutions less than paper checks and records. The infrastructure is in place for cybercash to provide more information security in a transaction than credit cards do now. As confidence in this security grows, cybercash will gain more acceptance.
On the downside, however, uncontrolled growth of cybercash systems could produce many different systems that may not be able to communicate with one another and may prove difficult to regulate. Cybercash may be less secure than currency and checks, and it may be available only to those who can afford a home computer. Many in the financial services and computer industries call the advent of cybercash a revolution. Soon after 2000, we may never make purchases the same way again.
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