24 September 2018

Why Amazon Won’t Be Disrupted By Tax Ruling

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The U.S. Supreme Court has just overturned a decades-old tax ruling that had allowed many internet retailers to avoid having to charge their customers sales tax.

The overturned ruling only let states require businesses to collect sales tax from customers if that business had a physical presence in the state — whether it be a storefront, corporate office or warehouse — in turn creating a loophole for online retailers like Amazon, who for years had a pricing advantage since their customers did not have to pay tax. That loophole appears to be closing.

In a 5-4 decision delivered today, the Supreme Court sided with the state of South Dakota, which enacted a law requiring retailers — even if they reside out of state — to collect sales tax if they “deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions for the delivery of goods or services into the State.”

While traditional retail trade groups like the National Retail Federation applauded the move as one that “clears the way for a fair and level playing field,” Amazon will likely be just fine. You can expect Amazon to remain dominant here in the U.S. since it has distinguished itself by focusing as much on convenience as price over the last decade.

Thursday’s ruling by the U.S.’s highest court does swing open the door for states across the country to require internet merchants to collect sales tax from online customers. As a result, stocks of publicly traded e-commerce companies like Etsy, Wayfair and Amazon dropped on the news.

But there are a few likely reasons why Amazon’s stock price dropped only a tiny bit and why I’d be very surprised if the ruling hurt Amazon’s long-term growth trajectory.

First, Amazon already collects sales tax in states across the U.S. on goods that it stores — and sells itself — known in the industry as “1P” or “first-party sales.” First-party sales account for just under half of all Amazon purchases. Amazon started collecting sales tax on 1P sales in many states in conjunction with the opening of an Amazon fulfillment center there.

When it comes to third-party sellers who hawk their wares on Amazon — which account for just over 50 percent of items sold worldwide on Amazon — things are a bit different.

Historically, these merchants have decided when and if to charge sales tax to Amazon customers. But starting this year, Amazon began collecting and remitting sales tax on third-party orders being sent to customers in Washington as well as Pennsylvania — states that have passed so-called “Marketplace Facilitator” laws requiring a marketplace like Amazon to collect tax on behalf of the merchants who sell on its platform.

A few other states have already passed similar legislation, meaning the list of places where Amazon collects tax on behalf of its sellers will grow. Amazon is prepared for this.

If that list does grow long and Congress does pass new legislation that impacts small online merchants as much as big ones, it’s possible that some Amazon merchants could become less popular with customers because their prices will rise to account for the new tax-collection rules. At the same time, Amazon’s less-powerful competitors will have to deal with this stuff, too.

But the real key here is that Amazon has spent more than a decade — since at least the creation of Amazon Prime in 2005 — differentiating itself not just through the pricing advantage it sometimes had over traditional retailers, but by focusing on becoming the most convenient place for consumers to shop for an increasing variety of products.

For years, it accomplished that through Prime’s unlimited two-day delivery promise for a flat annual fee. Over the last few years, the convenience differentiator has expanded to include a wide array of goods available for free same-day delivery, and thousands of goods available — including Whole Foods groceries — within two hours in major cities through the Prime Now program.

Add to this list new initiatives like no-checkout Amazon Go stores and in-home delivery, and you can see that convenience is at least as important to Amazon as always having the absolute lowest price.

As Amazon critic Stacy Mitchell, of the Institute for Local Self-Reliance, said on Twitter: “It’s good news but too bad the Court didn’t act years ago, before Amazon grew to rule online commerce.”

Click here for the original article from Recode.

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