When a $226 billion a year business is about to change, it makes sense for investors to pay close attention to the potential winners and losers. This is exactly what’s happening with Internet sales and the potential behind the “Marketplace Fairness Act.” If passed, this act would require sales tax collection from any online retailer with sales over $1 million. This bill has the potential to change how customers view online shopping, and might hurt one of its biggest proponents most of all.
Why Now? The simple reasoning behind this bill can be summed up in one sentence. “Last year states could have collected more than $11 billion in online sales tax revenue according to a study by the University of Tennessee.” When it comes right down to it, $11 billion is a lot of money, and with state budgets already strained, it’s not hard to imagine this is the number one reason this bill is under consideration.
To some, the bill seems like a logical step to even the playing field between online and traditional retailers. However, there are others that claim that the current situation is fair and doesn’t need to be changed. Ironically, one of the supporters of the bill is Amazon.com, Inc. (NASDAQ:AMZN). While traditional retailers like Target Corporation (NYSE:TGT), Wal-Mart Stores, Inc. (NYSE:WMT), and Best Buy Co., Inc. (NYSE:BBY), would seem to benefit the most, eBay Inc (NASDAQ:EBAY) might benefit as well.
What’s The Problem With Online Retailers Collecting Sales Tax? According to eBay Inc (NASDAQ:EBAY)’s Brian Bieron (Head of Global Public Policy), eBay is trying to protect small business owners, and opposes the bill because of the limitation being set at sales of $1 million or more. eBay would prefer a higher ceiling of $10 million, and an employee count requirement.
The founder of BradsDeals.com, Brad Wilson goes even further and says that, “(online retailers) don’t need more cops or streets paved or whatever else goes into supporting (local) retail.” There is a concern that small businesses will either cut back to stay under the $1 million level, or that they won’t be able to expand as quickly because of the burden of collecting sales tax in multiple states.
What Is Really Going On? Whether those who oppose the bill like it or not, this bill is almost certain to pass. Amazon.com, Inc. (NASDAQ:AMZN) posted $61 billion in sales last year, and analysts expect earnings growth of more than 37% in the next several years. eBay posted over $15 billion in sales last year, and is expected to grow at a rate of 15%. With billions of dollars at stake, customers should get used to seeing sales tax on their online purchases.
If you think about it logically, this makes perfect sense. Online sales do not happen in a vacuum. If a customer buys a computer from Walmart.com they pay sales tax, but if they buy the same thing through Amazon.com, Inc. (NASDAQ:AMZN) they do not. The idea that sales taxes only support local retail is foolish with a lowercase f, of course.
Wal-Mart Stores, Inc. (NYSE:WMT) generated $469 billion in sales last year, Target Corporation (NYSE:TGT) generated $73.3 billion, and Best Buy Co., Inc. (NYSE:BBY) sold $50.7 billion, if all their sales were taxed, at even a 6% rate, this would equate to over $35 billion in tax revenue. Why should these companies be forced to collect taxes and online retailers not fall under the same requirement?
Who Are The Real Winners? I’ve heard some argue that Amazon.com, Inc. (NASDAQ:AMZN) supports this bill because they see it as a barrier to entry. However, I think this underestimates the value that tax avoidance plays in online shopping. If a customer knows they have to pay sales tax either way, the idea of showrooming might disappear.
In a world where sales tax is unavoidable, a customer looking for a television might just buy it directly at the retailer. As an example, a customer looking at a 60″ Samsung Plasma TV in Best Buy, can walk out with the item for $849.99, or they can buy it from Amazon.com, Inc. (NASDAQ:AMZN) for $847.99. With such a small difference, there isn’t much sense in buying online.