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Could This Tax Put Amazon In Danger?

Consumers are wondering whether they’ll have to pay more taxes to shop online after the Supreme Court’s recent ruling on internet retail. But what does it mean for investors in e-commerce stocks such as Amazon.com(AMZN, $1,730.20)?

In the long-term, not much.

The nation’s highest court handed brick-and-mortar retailers a victory on June 21 when it said states can require internet retailers to collect sales tax on e-commerce sales even if the internet retailer doesn’t have a physical presence in the state. Traditional retailers have been pushing for such a move for years. Indeed, the National Retail Federation, the industry’s trade group, took an extended victory lap on the news.

“The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well,” NRF President and CEO Matthew Shay said in a statement. “This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.”

What the Supreme Court decision doesn’t change is an inexorable shift in shopping habits.

The Trend That Really Matters

Brick-and-mortar retail still dwarfs e-commerce. Internet sales accounted for only 9.5% total U.S. retail revenues in the first quarter of 2018, according to the U.S. Commerce Department.

The issue for traditional retailers is that e-commerce sales grew 16.4% year-over-year in the first quarter, even as total retail sales grew just 4.5% year-over-year. So while brick-and-mortar is bigger than e-commerce now, it’s losing market share, and there’s no turning back the tide. Market researcher Forrester expects e-commerce to account of 17% of total U.S. retail sales by 2022.

Had state and local governments been allowed to require sales tax payments from online merchants, they could have collected as much as $13 billion for all of 2017, according to a report from the Government Accountability Office.

Those receipts might have made a big difference to state and local government, but they’re relatively small in the grand scheme of consumer spending. Total U.S. retail sales in the first quarter alone came to $1.3 trillion, with less than 10% coming from e-commerce.

Besides, numerous internet retailers including Amazon, the largest e-commerce player by far, already collect state sales tax. That’s why analysts remain sanguine about its prospects.

“We do not believe the ruling will have an adverse impact on our e-commerce companies,” writes William Blair analyst Ryan Domyancic.

The analyst, who has an “Outperform” (equivalent of buy) rating on AMZN, notes that the e-commerce giant already collects sales tax on first-party sales in the 45 states that have a statewide sales tax.

Amazon has been building fulfillment centers across the country for years, forcing it to collect state sales taxes as it expanded. “As it began collecting tax in more states, there was no indication its sales were negatively affected,” Domyancic writes.

As for Wayfair (W, $114.28), which was a defendant in the Supreme Court case, the company’s ongoing expansion of its fulfillment network means it collects sales tax on 80% of its U.S. orders, William Blair notes.

“From our standpoint, it does not appear the collection of sales tax in incremental states adversely affected its growth over the past several years,” writes Domyancic, who rates Wayfair shares at “Market Perform” (hold).

Companies such as eBay (EBAY, $38.01) and Etsy (ETSY, $43.60), which host small businesses, face more uncertainty in light of the court’s ruling, since they would be responsible for collecting any sales tax.

The bottom line is that the secular shift toward online shopping remain the dominant theme in retail. Whether you’re a long-term investor in Amazon or a traditional retailer, little has changed.

source: kiplinger.com

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