by Alex Christensen, an analyst at Global Risk Insights
Lobbying efforts by brick-and-mortar stores to charge online sales tax could be a big blow to the e-retailer Amazon.
One of the key advantages of Amazon.com’s business model is being slowly stripped away. New research by the National Bureau of Economic Research (NBER) shows that it could cost Amazon 10% of its sales.
Amazon has long been able to beat brick-and-mortar stores on price because it was not required to charge sales tax in 35 US states. But more states are changing their tax laws to eliminate this advantage for internet retailers. The NBER analysis shows the stakes of today’s biggest retail battle, online versus brick-and-mortar, are in the billions and will not be decided by the market. Rather it will be decided in state legislatures.
Each state creates its own sales tax laws, but the Supreme Court has laid down some basic rules on what they cannot do. Biggest among them is that they cannot tax businesses that do not have a ‘physical presence’ within the state, even if shipping goods to customers in that state.
The case goes back to mail order businesses in the 1980s, but is having a billion dollar impact on e-commerce. Since Amazon only has distribution centers in 15 states, 35 states have been hampered in charging sales tax to Amazon. Of course, Amazon is just one of the big e-commerce players, but in the eyes of most retailers and consumers, it is the one that matters.
As online shopping has become a legitimate threat to traditional brick-and-mortar stores, retailers have looked for ways to shrink Amazon’s advantage. Matching prices, for example has proven difficult, particularly when Amazon doesn’t have to pay rent or cashiers where it does most of its sales. In the past few years, a coalition of big box retailers and small, independent shops have come together (which does not happen often) to lobby state governments to change their online sales tax laws.
Until these online sales tax laws began passing state legislatures, Amazon and other online retailers could beat their brick-and-mortar competitors by 4% to 7.5% on sales tax alone in the 45 states with sales tax. For big-ticket items like televisions and computers, the impact has been massive. Just look at Best Buy, the winner of the pre-Amazon electronics retailer wars. The chain has become an informal Amazon showroom. The company’s sales have shrunk for 13 of the last 14 quarters.
State governments have a big incentive to force Amazon to pay sales tax. For one, it generates more revenue without adding to local businesses’ tax bills. More important is that these laws help improve the competitiveness of some of the states’ largest employers. Take Minnesota, for instance, which passed an online sales tax law in 2013. It is home to the headquarters of Target, the nation’s second largest retailer, and Best Buy, among the biggest losers from e-commerce. Helping these businesses stay afloat keeps more jobs in the state, and the strong lobbying efforts of the retailers reiterated this.
Online sales tax laws are not the end of the story, however. Minnesota’s law, like many others, justified the tax on the fact that Amazon had affiliates in the state that listed products on the Amazon Marketplace and fulfilled the orders. When Minnesota’s law went into effect, Amazon ceased its relationships with Minnesota-based affiliates. This plan of action for Amazon is sustainable for now, but as more states (and maybe the federal government) pass similar laws, they will be forced to rethink their affiliate system.
The US Congress also is looking at changing how states can treat e-commerce sales in the Marketplace Fairness Act. As the name suggests, the bill is supported by brick-and-mortar retailers looking to remove Amazon’s advantage.
For its part, Amazon is trying to be part of the conversation. They have shown willingness to negotiate how these sales tax laws will work, acknowledging that online sales tax has momentum. They would rather help shape the outcome to their advantage than be blindsided by a law crafted by their competitors.
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That said, Amazon and Overstock.com appealed a New York state law all the way to the Supreme Court, although the Court declined the request to hear it last December. With the Supreme Court deciding not to take part in deciding the debate, it will be up to state legislatures and Congress.
So far, brick-and-mortar retailers have been more successful in their lobbying efforts. But as the NBER study points out, Amazon has more reason to change the nature of the online sales tax debate. It will likely argue that their model brings consumers things that traditional retailers cannot: convenience and selection. Amazon really does not have a choice: it cannot sustain a 10% decline in sales. Even now, Amazon is missing earnings expectations.
The focus of the online sales tax debate naturally centers on Amazon, but the e-commerce world is a crowded market — from small, niche retailers to the online branch of Wal-Mart. The question is whether the e-commerce industry will be able to muster enough political clout to change the direction of the debate, which it has so far been losing.
