The Marketplace Fairness Act, currently under consideration by the U.S. House of Representatives, is designed to force online retailers to collect sales taxes in states where they do not have a physical presence. The University of Tennessee estimates that states could have collected an extra $11 billion in revenue last year had the bill been enacted. This is a fairly compelling argument, and when coupled with discussions of equity in the marketplace, it seems almost inevitable that this bill be passed.
Right now, companies like eBay Inc (NASDAQ:EBAY) and Amazon.com, Inc. (NASDAQ:AMZN) maintain a competitive advantage over physical retailers in that they can sell products free of sales taxes. Not only has this increased profit margins, but online retailers also save money on location rent by only ordering product as requests come in. Amazon.com, Inc. (NASDAQ:AMZN), however, supports the bill while eBay Inc (NASDAQ:EBAY) is staunchly opposed to it.
Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) are natural beneficiaries of the tax (remember, it partially removes online retailers’ price advantages), and thus they support it.
For the purposes of this article, let’s assume that the bill’s passage is inevitable and work from there. Who wins, who loses, and why?
Amazon has voiced its support of the bill, but is that support misguided?
Amazon.com, Inc. (NASDAQ:AMZN)’s rapidly increasing revenue ($61 billion last year, with analysts projecting a 37% increase in the next few years) indicate that it will be hit hard by the tax, but from a corporate standpoint there will be little effect, and it might even benefit the company.
Amazon.com, Inc. (NASDAQ:AMZN) has moved toward a same-day shipping model, which entails building warehouses in almost every state. The upshot of this is that for the most part it is required to collect those taxes anyway, so a requirement that the company collects sales tax would be moot and would have no substantive effect. The same-day shipping nearly eliminates the immediacy advantage that brick-and-mortar stores have, so this is a win-win for Amazon, even though it must collect sales tax.
On top of this, actually imposing the tax poses a logistical issue for online companies, given the panoply of state tax rules that exist. This issue is larger for small companies, whereas Amazon.com, Inc. (NASDAQ:AMZN) won’t be affected so much. Essentially the sales tax makes life harder for Amazon’s competitors, which is great for Amazon.
The takeaway with regards to Amazon.com, Inc. (NASDAQ:AMZN) is that it would indeed be helped. While it would lose some of its pricing advantages, it would also lose competition online while becoming increasingly competitive with physical retailers. This is good for Amazon, but I’d consider the company a stock to hold. If small businesses adapt better than expected, it could spell trouble for Amazon.
eBay is worried, but why?
eBay Inc (NASDAQ:EBAY) has been outspoken against the definition of a small business in the Act, which places a revenue cutoff at $1 million. The company believes that this should be higher, to the tune of $10 million.