Shares of internet retailers Amazon (AMZN - Free Report) and Wayfair (W - Free Report) , and Overstock (OSTK - Free Report) sold off early Thursday on news that the U.S. Supreme court had decided that States could impose sales tax on interstate sales, specifically including internet transactions. Brick and Mortar retailers Wal Mart (WMT - Free Report) and Target (TGT - Free Report) rallied on the news.
In the decision South Dakota vs Wayfair et al, the court voted 5 to 4 overturned a 1992 ruling that exempted sellers from collecting sales tax on transactions with customers in states where the seller did not have a physical presence. The dissenting four justices issued an opinion stating that they fundamentally agreed with the collection of interstate sales taxes, but thought that the issue should be decided by congressional legislation rather than judicial decision.
The 1992 decision in Quill Corp vs. North Dakota stated that requiring vendors to navigate state sales taxes in the 45 states that impose them - as well as thousands of municipal taxes within those states- would be an undue administrative burden on sellers and would be restrictive to commerce. Internet sales in 1992 were a tiny sliver of retail commerce, and the majority opinion in Quill primarily concerned mail-order business. The court noted that the justices in 1992 could not have envisioned a world in which 89% of Americans have internet access and e-commerce sales top $450 billion annually.
In Wayfair, the court upheld a South Dakota regulation that required that sellers who deliver a total of $100,000 in goods and services or who makes more than 200 transactions annually in the state to collect a flat statewide sales tax. The court concluded that the South Dakota law did not impose an undue burden on merchants or restrict commerce because the tax was administered only at the state level, it clearly defined tax rates and which goods and services they applied to and that the state provides free software to sellers that streamlines calculating and administering the tax.
For the moment, only South Dakota is affected by the decision, but presumably other states will quickly adopt tax regulations of their own that are similar to the South Dakota laws.
Who are the Winners and Losers?
The obvious winner as a result of Thursday’s decision is the states themselves who will now be free to collect sales tax on transactions that they previously could not. Estimates range from $8 billion to $34 billion annually in additional state revenue. Consumers, not the retailers themselves, will ultimately bear the burden of the additional sales taxes.
Smaller retailers also cheered the news with industry trade organization the National Retail Federation stating that they believe the ruling will create a “level playing field” for traditional sellers to compete with online e-tailing.
As far as large public retail companies though, the effect is likely to be small.
First, for revenues or earnings to be significantly damaged, you’d have to suppose that customers change their buying behavior and change venues based of the imposition of sales tax - or lack thereof. While some consumers might “game” sales tax laws on large purchases like cars and jewelry by purchasing in different jurisdictions, there’s little evidence that consumers change their internet shopping behavior in an environment where sales taxes are inconsistently collected across different websites and states.
Is the customer who’s buying a phone case or a pair of shoes online really going to sign off, jump in the car and drive to a retail store - where they already collect sales tax - just because the website now collects sales tax as well?
Amazon already collects state sales tax on all of its sales direct to consumers, and collects tax on a small portion of third-party sales conducted on its website in the states that currently require it to do so. The administrative burden of collecting tax on all third-party sales is negligible, and because Amazon charges third parties a transaction fee for administering state taxes, the company could actually benefit slightly from the ruling. It's also possible that additional third-party sellers will choose to use Amazon in order to avoid having to collect and distribute sales tax revenue on their own.
In broad economic terms, additional taxes generally slow economic activity somewhat and there’s an argument that this ruling – which really only allows the enforcement of taxes that already existed but were not being uniformly collected – might slow overall retail commerce by a small amount.
As far as the e-tailors who have seen shares selloff on Thursday though, as well as the brick-and-mortar enterprises that are rallying, the actual effect on revenues and earnings going forward is likely to be a lot smaller than today’s market reaction would imply.
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