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.
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.
eBay’s smaller sellers will still be able to avoid collecting sales tax, and for bargain hunters, this would make the site their first shopping destination. Amazon.com, Inc. (NASDAQ:AMZN) will have to compete primarily on price and convenience. The big three box stores, Best Buy, Target Corporation (NYSE:TGT), and Wal-Mart Stores, Inc. (NYSE:WMT), should benefit directly from this even playing field. The fact is, customers can already buy online and have the items shipped to any of these stores. In addition, all three companies have been aggressive about matching prices.
With analysts calling for negative growth at Best Buy in the next few years, this sales tax issue could help reverse that trend. The stock pays the highest yield at 2.6%, and sells for the cheapest P/E ratio (11.7) of the bunch. Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT) will almost certainly gain some sales momentum from this change. With over 4,000 domestic Wal-Mart Stores, Inc. (NYSE:WMT) stores, and about 1,700 Target Corporation (NYSE:TGT) stores, it’s not hard to imagine customers choosing immediate satisfaction over saving a dollar or two. With 9.4% and 12% growth expected from Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) respectively, investors might want to consider what would happen if both companies growth rates increased.
Though eBay wants the bill to change, eBay seems better positioned than Amazon. eBay’s business is only 60% driven by their Marketplace business as it is. With smaller sellers still able to avoid sales tax collection, more online shoppers might check eBay first.
Amazon seems to be the clear loser. The company is almost certain to lose sales to their existing competition. Amazon’s pricing isn’t as cut-throat as it used to be, as evidenced by their over 26% gross margin last quarter. Assuming this bill passes, Amazon’s competition is likely to make sure that every customer knows that the playing field has been leveled. Considering that Amazon’s stock sells for nearly 200 times projected earnings, any slowdown in growth could level the stock price as well.
The article Who Wins And Who Loses When This Battle Is Done? originally appeared on Fool.com and is written by Chad Henage.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
