By Chad Sandstedt of Value Investing Lab
This week Amazon announced a new service for collecting sales tax for its third-party merchants. In doing so, it tips its hand a bit on the issue of sales tax for items purchased online.
According to Internet Retailer magazine, Amazon will offer to handle the sales tax collection process for its third-party merchants in exchange for 2.9% of the tax collected. I think this is a smart move by Amazon that could soon become a sizable business (link: http://www.internetretailer.com/2011/11/03/amazoncom-play-tax-collector-client-merchants). If the value of all retail ecommerce is about $150 billion (source: http://www.census.gov/econ/estats/2009/2009reportfinal.pdf) and assuming an average sales tax rate of 7.5% (source: Chad’s best guesstimate), the total sales tax bill could be over $11 billion. 2.9% of this would be $326 million for providing a service that Amazon is already doing for itself. Not every online retailer is going to use Amazon’s service, but this math demonstrates the potential size of the market.
Just as important in this message is that Amazon believes the online sales tax train has left the station. This has ramifications for the brick and mortar retailers, specifically Best Buy. Right now the brick and mortars are operating at a disadvantage to Internet retailers because they must collect sales tax. Today’s consumer has a choice between getting an item right now from a local retailer or waiting 3-4 days to get the same item without paying any sales tax from an online retailer. As the price of the item goes up, so does the advantage for buying that item online. Using a $599 iPad as an example, I could walk into my local Best Buy today and walk out with an iPad for $645.42. My alternative is to buy the same iPad from one of the many online retailers located outside of California and pay just $599 total, maybe $609 if they don’t offer free shipping. That’s $36 to $46 for waiting 3-4 days which could put a tank of gas into my car or buy a dinner this weekend.
If Internet purchases are taxed at the same rate, the advantage will flip to the brick and mortar retailer because there will be no shipping charge and I will pay the sales tax regardless of where I shop. I”m not for higher taxes, but I believe this inevitable shift to online sales taxes presents an investment opportunity with the brick and mortar retailers, the same ones that are being given up for dead by Mr. Market. Being able to walk out of the store paying the same or less as you can online along with being able to return the item locally if it breaks will provide a big advantage to companies with a physical presence.
Disclosure: I am long Best Buy.