3 Reasons the ‘Amazon Tax’ Won’t Kill Online Retailers

by Susan J. Aluise | April 4, 2013 7:00 am

Online shoppers’ tax-free ride is nearing an end after a New York Supreme Court ruling last week, but one thing is certain: Not even the court can counter the laws of supply and demand. And among consumers, the demand for online shopping is on the rise.

In a 4-1 vote, the court dismissed a bid by e-tailers Amazon (NASDAQ:AMZN[1]) and Overstock.com (NASDAQ:OSTK[2]) to overturn the so-called “Amazon Tax” — a 2008 law requiring Internet-only merchants to collect state and local taxes from New York residents if they have affiliates in the state. The New York statute redefined a 1992 U.S. Supreme Court decision that e-tailers could not be forced to collect taxes unless they had a “physical” presence in a state.

Although any retailer with brick-and-mortar stores in New York has always been required to collect taxes — even for online purchases — the state extended that requirement to retailers that had affiliates in the state. That applies to New York-based operators of independent websites that link to Amazon products.

While the ruling is a setback for online retailers in the short run — and you can count on Amazon and Overstock.com making an appeal to the U.S. Supreme Court — it might accelerate the move toward more logical tax treatment for Internet sales. In the absence of a national policy, states have developed a crazy quilt of laws and courts have rendered split decisions — some states collect taxes on Internet purchases, but most don’t. Perhaps that’s one reason Amazon would prefer Congress pass the Marketplace Fairness Act[3], which would make it easier for states to collect taxes on online merchants.

One way or another — and sooner rather than later — online shoppers are going to have to cough up state and local sales taxes.

That said, e-tailers shouldn’t fret. Here are three reasons why:

E-commerce Is Experiencing Strong Growth: U.S. online retail sales will reach $370 billion by 2017[4], up from $231 billion in 2013, according to a study by Forrester Research released last month. That reflects a 10% compound annual growth rate over the next five years. E-commerce is no longer the embryonic market it was back in the late 1990s when online merchants beat back the taxman with fears that e-merchants would be overwhelmed by the hundreds of state and local tax calculations they would have to make. Today’s technology makes it easy to calculate taxes, and merchants most affected by a national law — those with more than $1 million in annual sales — should be able to roll with the punches reasonably well.

Brick-and-Mortar Stores Have Always Collected Taxes: Retailers with a physical presence always have had to collect state and local sales taxes, so they have argued that requiring online stores to collect taxes is only fair. That seems doubly true as traditional brick-and-mortar stores morph into multi-channel retailers, which is now a competitive requirement. However, all the Amazon Tax would do is level the playing field — and only on the tax front. Even with equal taxes under law, online shopping has several advantages; it’s convenient, offers a broad array of choices and online merchants’ operational efficiency can drive down prices — all attractive qualities to consumers.

E-tailers Are Building Real-World Warehouses and “Showrooms”: A growing number of online companies are setting up shop off-line. Online boutiques like The Gap’s (NYSE:GPS[5]) Paperlime unit are opening “showrooms” — slimmed-down stores[6] that are supplied by a nearby distribution center, according to The New York Times. Meanwhile, other e-tailers, like AMZN, are opening more distribution centers so that they can fulfill online orders faster, and Google (NASDAQ:GOOG[7]) is working on opening physical stores[8].

Bottom line: Amazon and other e-tailers might not throw a celebratory parade over the prospect of being taxed, but it won’t kill them.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

  1. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  2. OSTK: http://studio-5.financialcontent.com/investplace/quote?Symbol=OSTK
  3. Marketplace Fairness Act: http://www.wired.com/business/2013/03/congress-backs-internet-sales-tax/
  4. will reach $370 billion by 2017: http://www.forrester.com/US+Online+Retail+Sales+To+Reach+370+Billion+By+2017/-/E-PRE4764
  5. GPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPS
  6. slimmed-down stores: http://www.nytimes.com/2012/12/19/business/shopping-sites-open-brick-and-mortar-stores.html?pagewanted=2&_r=0
  7. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  8. working on opening physical stores: http://online.wsj.com/article/SB10001424127887323764804578312530021763450.html

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