Let's make a deal 

'We're a military town," people often say. And the signs are everywhere: "15 percent military discount." "Military gets first month's rent free." "Military — no down payment."

The signs most of us don't see, though, are labels displayed at the base exchanges, such as this one: "Tax savings $75.82" on a Sony laptop.

From 2008 to 2010, exchanges at Fort Carson, Peterson Air Force Base and the U.S. Air Force Academy sold nearly $600 million worth of goods to active-duty and retired military families, with most of those sales not subject to local and state sales taxes. Nor did the exchanges, run by a branch of the military called the Army and Air Force Exchange Service (AAFES), pay any local property tax, personal property tax or income tax.

The sales tax break alone translates to annual losses of up to $4.2 million for El Paso County, another $4.2 million for the Pikes Peak Rural Transportation Authority, $12.7 million for the state of Colorado, and $2.8 million for the city of Colorado Springs, based on sales volumes supplied by AAFES. (Only Peterson lies within the city limits.)

That might not sound like a lot in the grand scheme of things, but those dollars might make the difference in adding patrol deputies, fixing potholes, or planting flowers in medians.

"I would like to think that any additional tax revenue could be put to good use," says El Paso County Commissioner Dennis Hisey, whose district includes both Carson and Peterson.

While some say forgoing sales tax is a paltry trade-off for the bonanza that comes with thousands of service members at Fort Carson, Peterson, the academy and Schriever Air Force Base, along with roughly 28,000 military retirees locally, others are starting to suggest that it's time to pull the plug on such perks.

"The Defense Department should be about putting bayonets in the heart of a terrorist, or in the heart of a North Korean," Ret. Marine Corps Maj. Gen. Arnold Punaro told a group at the Center for Strategic and International Studies last year, the Wall Street Journal reported. "It shouldn't be about waving a commissary card."

Relevancy questioned

The concept of the base exchange is rooted in the nation's struggle for independence, when civilian traders supplied the fledging U.S. Army with chewing tobacco, blankets and knives, Army Maj. Roberto Salas writes in his 2009 master's thesis presented to the U.S. Army Command and General Staff College about the base exchange system.

Today, that system might seem redundant for troops who live amid a profusion of retail options. "This competitive environment, coupled with global market forces, has placed the relevancy of AAFES in doubt," Salas writes.

But, he notes, the Pentagon considers base exchanges, a network of 3,000 facilities in more than 30 countries and five U.S. territories, "an integral part of non-pay compensation for military personnel." That network also employs 43,000 people, a quarter of whom are military family members. So the exchange system, with total sales of more than $8 billion in 2008, according to Salas' research, probably is here to stay.

Though AAFES receives a small taxpayer subsidy, it's largely self-sustaining. Patrick Riordan, AAFES general manager in Colorado Springs, says that roughly 60 cents of every dollar earned by the exchanges is pumped into Morale, Welfare and Recreation programs that build playgrounds, libraries, gyms and other projects on military bases. Riordan didn't provide a dollar figure of that contribution.

The other 40 percent goes back into the exchange business, including construction. At Carson, AAFES soon will embark on a project, to be completed in November, to nearly double the 60,000-square-foot exchange.

Exchanges, which Riordan says sell goods at roughly 23 percent less than local market prices, are separate from the commissary system. Commissaries are grocery stores run by the Defense Commissary Agency, whose website boasts that prices average 30 percent below market. The Commissary Agency reported nearly $6 billion in sales worldwide in 2009, about 1 percent of total U.S. supermarket sales, as reported by the Food Marketing Institute of Arlington, Va. Commissaries collect no sales tax, consistent with Colorado law that exempts groceries from sales tax.

Active-duty and retired military and their families are eligible to shop at commissaries and exchanges.

The exchanges' main stores, which sell goods ranging from clothing to luggage, electronics and household cleaners, charge no sales tax. Nor do exchanges' military clothing stores or specialty shops. Taxes are collected at exchanges' concessions, such as fast-food stands, and their fuel stations.

Taxes are also collected on exchange sales of beer, liquor, wine and tobacco. But Riordan wasn't able to say how much those accounted for within the $423 million in sales from the main local store, clothing and specialty stores from 2008 to 2010.

What a deal

During my visit to Carson's exchange, I saw prices similar to sale prices at Target, Kohl's, JCPenney or Macy's. A Coach-brand handbag that normally sells for $358 was marked at $286, a 20 percent price cut. No sales tax saves another $14.30.

Nautica men's jeans were a better bargain, marked down from $55 to $29.95. Revlon liquid makeup was priced at $10.25, down from the drugstore price of $12.99, and an Under Armour women's T-shirt was $16, compared to $19.99 to $29.99. In electronics, a 52-inch Sharp LED LCD high-def television was going for $1,979, with a tax savings of about $100.

"Our electronics do very well," Riordan says.

Outside the main store were typical mall shops, such as GNC, The Embroidery Shop, ABBA Eye Care, a barber shop, Reminiscent Confections and Patriot Outfitters, all of which collect sales taxes. Many of these shops are run by locals, including retired Army and Vietnam veteran Red Moore, whose Military Gift Shop sells caps, magnets, license plates, flags and decals.

Moore notes his prices are 20 percent below the local market. And while his store collects sales taxes, he says he does 75 percent of his own shopping in the tax-free exchange. "It's a good deal," he says.

The tax break is justified, he adds, because he and the thousands of other retirees "are doing their fair share of city and county maintenance" via income and property taxes. "I'm paying my contribution to the government."

But Hisey wonders if the tax exemption should be lifted for stateside exchanges. "It makes perfect sense to me if they're doing that overseas," he says. "I've always questioned why we would do it in the U.S. As far as I know, their prices are what you would get at a Sam's [Club] or Costco-type store. The only real difference is the tax."

Actually, Salas' study found that exchanges undercut Wal-Mart's prices by only 6 percent, and that an inspector general's investigation found many customers felt the sales-tax savings was the only benefit to shopping at exchanges. Given falling customer confidence and operational problems of exchanges, Salas suggests revamping AAFES and funding morale and welfare projects directly with tax dollars, instead of profits, which are placed at risk if exchange revenue falls.

"The origins of AAFES were to serve soldiers in remote areas," Salas concludes. "It is possible the military exchange system has outlived its intended goals ... The vast majority of military installations have sufficient regional commercial retail activities to provide a viable alternative to the military exchange."


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