Why E-tailers Aren’t Sweating Internet Sales Tax Legislation

by Alyssa Oursler | February 20, 2013 9:43 am

It’s baaaaack.

Legislation that could require Internet retailers to collect sales taxes — called The Marketplace Fairness Act — has been reintroduced by lawmakers. As The Wall Street Journal explains[1]:

“For decades, states have been unable to force online stores to collect sales taxes because of a 1992 Supreme Court decision that found merchants don’t have to gather sales taxes in states where they lack a physical presence. State laws typically require residents to still pay taxes on self-reported online purchases, but consumers rarely do so.”

The new law would allow states to collect sales tax from e-tailers, providing an exemption for businesses with less than $1 million in annual revenue.

Along with this comes the normal chatter about the implications of such a piece of legislation … and the instinctive response is simple. As Washington has said, the fact there is no tax on Internet retailers without a physical presence in-state is a “handicap” for their brick-and-mortar competitors[2].

On the face of it, that makes the potential new legislation good news for brick-and-mortar retailers — from Walmart (NYSE:WMT[3]) to Best Buy (NYSE:BBY[4]) to department stores — and bad news for Internet retailers like Amazon (NASDAQ:AMZN[5]) and eBay (NASDAQ:EBAY[6]).

But while such a conclusion sounds logical, it really isn’t that simple.

To start, the legislation only gives states the option to collect the tax. Of course, with tight budgets, it’s difficult to see why a state wouldn’t implement it.

Moreover, there’s several factors that show the legislation wouldn’t necessarily put the screws to online retailers:

  1. Amazon Isn’t Stupid: Amazon is the biggest name in e-tailing, and it still supports the tax[7]. While that in itself seems to toss a wrench in the original conclusion, it’s just the beginning. The company already has agreed to charge sales tax in certain states[8] … and in return, AMZN has received permission to place warehouses in those states, helping to speed up its shipping time. That’s a smart move. The Internet sales tax is inevitable, yet Amazon found a way to benefit during the process of its implementation.
  2. The Consumer Pays: In the end, the cost will fall on the consumer, not on the companies. Amazon’s margins won’t be affected by charging sales tax and eBay’s costs won’t skyrocket. We are the ones that will have to shell out a few more bucks than we used to when ordering some hip shirt online. Nothing about the business changes; the only real concern is that shoppers (in only some states) will stop using eBay because they now have to pay … well … what they have to pay everywhere else. And that brings me to my last point.
  3. It’s Just Tax: Maybe it’s just me, but I don’t generally base my small-item shopping decisions solely on tax. Sure, when I went to school at Gettysburg College, I’d use the tax-free ploy at the nearby outlet mall as a way to convince myself that buying another shirt was OK, but it wasn’t actually a deciding factor … it was just self-justification. Moreover, while lack of sales tax is/was an added bonus for e-tailers, it’s hardly the only perk. What about convenience and comparison power? What about free two-day shipping if you’re a Prime member? Heck, what about the sheer emotional joy of having a package arrive on your doorstep?

This isn’t all to say the added sales tax won’t matter; it will simply have a much more nuanced effect than it seems on the surface. Sure, super-cost-conscious shoppers might change some of their habits. And the advantage of buying big-ticket items (where a 10% sales tax is a pretty hefty addition) online undoubtedly will have dwindled.

But long-term, it shouldn’t keep the tide of shopping habits from its continued shift toward e-tailers.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

  1. The Wall Street Journal explains: http://online.wsj.com/article/SB10001424127887324162304578304460608633852.html?source=email_wsb_ts_11
  2. brick-and-mortar competitors: https://investorplace.com/2013/02/walmart-or-the-walmart-of-the-web/
  3. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  4. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  5. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  6. EBAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EBAY
  7. supports the tax: http://www.xconomy.com/seattle/2013/02/14/amazon-ebay-wrestling-over-newest-online-sales-tax-plan/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Xconomy_Boston+%28Xconomy+Boston%29
  8. in certain states: https://investorplace.com/2012/12/amazon-to-start-charging-sales-tax-in-mass/

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