A political shift, and a commercial change of stance by Amazon.com, Inc. (NASDAQ:AMZN) are going to make online shopping more expensive, as many states introduce a sales tax for on-line purchases.
According to a report in NBCNews.com, “In Congress, a rare moment of bipartisan unity is advancing bills that would legislate such taxation at the federal level”. The Marketplace Fairness Act appears to have excellent bipartisan support and therefore, may become law.
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Indeed, faced with increasingly big holes in budgets, states are hungrily eyeing this sales tax as an important source of revenue, more so because it’s rightfully theirs – only that retailers such as Amazon have been able to get away by not charging it due to a Supreme Court judgment in 1992 that said they weren’t required do so unless they had a physical presence in the state.
As states applied pressure, Amazon initially contested their claims, but have gradually veered around to the view that it may be better to charge the taxes, while at the same time begin ramping up its infrastructure of physical distribution points. It accordingly started to enter into deals with states for introducing sales tax in a phased manner, on the one hand, and developing physical distribution outlets that would generate employment, on the other.
Physical retailers are, of course, happy about these developments, because online retailers would stand to lose an important cost advantage in the form of the sales tax, which they earlier did not charge.
Brick-and-mortar shops were already feeling the heat from on-line retailing, largely due the latter’s far lower overheads. This, and the sales tax advantage resulted in the phenomenon of physical stores actually “showrooming” for the onliners – a practice where a customer would examine and test out a product in a showroom, and then go home to order it on-line instead! “You’ve been doing all of the work and then the online competitor steals the sale,” said David French, senior vice president of government relations at the National Retail Federation, and quoted by amarillo.com.
Yet, basic market preferences would be unaffected by changes such as sales tax. Note that e-commerce activity in the first quarter of this year was higher by 15 percent, when compared to last year. This might point to a deeper underlying trend rather than just the cost advantage between on-line and physical selling – it may be that consumers find the former, simply more convenient.
And, lest brick-and-mortars gloat too quickly: imagine Amazon making same-day deliveries. It may certainly be able to do this once its physical distribution is fully established, now that no sales tax hurdles stand in the way.
How will physical stores compete with that?