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Retail War Takes New Turn: Will Sales Tax Hit E-commerce?

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The Supreme Court on Jun 21 ruled that states have the right to collect sales tax from online purchases even if a company doesn’t have any physical presence in that state. This certainly is a game-changing decision given that businesses, primarily online retailers, so long were not bound to collect sales tax in states where they do not operate physically.

The Supreme Court ruling has been cheered by brick-and-mortar stores, which have been struggling to survive the e-commerce onslaught. That said, many online retailers are already collecting sales tax on their products in different states. Given this scenario, it needs to be seen, how big a pinch e-commerce companies would feel now.

Online Retail Hits Roadblock

The Supreme Court on Thursday ruled that states can collect sales tax on online purchases, overturning a 1992 decision that traditional retailers so long complained was putting them at disadvantageous position compared with online competitors. Although retailers with a physical presence were required to collect sales tax, it wasn’t binding on online retailers and upstarts, which would often skip it, thus making their products look cheaper.

The latest ruling definitely will bring relief for brick-and-mortar stores, which are striving to compete with e-commerce companies. The new ruling saw shares of traditional retailers jump immediately. Shares of Walmart, Inc. (WMT - Free Report) and Dollar General Corporation (DG - Free Report) increased 0.7% each, while Target Corporation (TGT - Free Report) jumped 1%.

On the other hand and quite predictably, shares of online retailers like Amazon.com, Inc. (AMZN - Free Report) , eBay, Inc. (EBAY - Free Report) and Etsy, Inc. (ETSY - Free Report) slid 1.1%, 3.2% and 0.6%, respectively. Amazon has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Amazon is Still Safe

Amazon took advantage of the law for years and refrained from collecting sales tax on its book sales and then other products for years. This made the company’s products look cheaper and was one of the key factors behind turning the fortunes of the company, which is now an e-commerce behemoth.

However, Amazon started collecting sales tax in all states since Apr 2017. Hence, it might not pinch the company much. That said, more than 50% of Amazon’s sales are from third party marketplace sellers, who often don’t collect sales tax. This is one area which might hurt Amazon, as with sales tax, the price of the products is likely to increase.

Other Online Retailers to Feel the Heat

Amazon may have started collecting sales tax but it’s the other small and medium-size online retailers that have been pushed to an uncomfortable corner with the new ruling. Companies like eBay, Etsy and Wayfair Inc. (W - Free Report) will now need to collect sales tax on the products they sell, which they so long had been avoiding.

Online furniture company, Wayfair, saw its shares fall 1.6% immediately after the ruling was passed. Online home furnishing and products retailer Overstock, Inc. (OSTK - Free Report) saw its shares plummeting as much as 7.2%, while Shopify Inc. (SHOP - Free Report) declined 4.5%. Understandably, the new ruling is likely to affect small and medium sized online retailers more, particularly those with no physical presence at all, as they had so long been giving stiff competition to brick-and-mortar stores by charging less for their products.

Level-Playing Ground for Traditional Retailers  

Brick-and-mortar stores have been long ruing that an absence of sales tax on online sales put them at a disadvantage. However, the new ruling will definitely give them a level playing ground. Moreover, traditional retailers like Walmart, Target and The Kroger Company (KR - Free Report) that are increasingly shifting focus toward online, collect sales tax for products sold online.

However, much like Amazon, they too don’t collect sales tax on goods sold by third parties on their platform. That said, online sales still make for a very small portion of the revenues for most traditional retailers. Walmart gets generates only 3% of its revenues online in the United States.

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