The American online sector has been dealt a damaging body blow by a Supreme Court ruling on Thursday that will allow US states the right to collect sales taxes on internet companies that do not have a physical presence in their states.
The 5-4 ruling ends the sales tax exemption that has existed since 1999. Some early reports claimed Amazon would be hit, but for the past couple of years it has been collecting sales tax in 45 states (which levy sales taxes) and Washington DC (a point Donald Trump has ignored in his tweeting diatribes against Amazon in recent months).
That’s because it has a growing number of warehouses and logistics operations in more American states as it has extended its same day/next day delivery service across the country.
But a loophole meant that third-party vendors who sell their products on the Amazon site were not subject to sales tax. It’s not clear whether the new rule will hit these sellers (who are thought to account for around half of all retailing sales made by Amazon).
South Dakota rules require at least $US100,000 in annual sales in the state to be taxed. Being a small state, that could see quite a few online businesses avoid tax in that state. Amazon shares stil fell 1% on Thursday, but shares of other online sites suffered more. For example shares in the arts and crafts platform Etsy fell 3% 3% and eBay shares lost 2.4%. The winners were legacy retailers.
In a day where all US markets fell sharply, the big traditional retailers saw gains. Target shares rose 2.3%, Walmart shares were up 0.7%, Dollar General rose 1.1% (a cheap chain store), Nordstrom (a department store chain) saw a 2.1% gain, Gap shares rose 1.1%, Kohl’s (another department store group) saw its shares up 1.6%, while supermarkets group, Supervalue saw a 3% gain. Kroger shares rose 9% on the new and an earnings upgrade.
Shares in Macy’s, America’s biggest department store group didn’t benefit, losing 0.3% on the day.
Ratings groups, Moody’s and Standard & Poor’s reckons the decision is good news for retailers and the states (while shares in shopping mall operators also edged up).
Moody’s said the news was positive for bricks-and-mortar retailers.“In the case of Amazon, its proprietary sales will be largely unaffected as it is already collecting sales tax in ‘sales tax’ states in which it operates a physical presence, however, the impact on its growing third-party business could be meaningful as, up until now, a chunk of these sales have not been taxed,” said Moody’s lead retail analyst Charlie O’Shea, according to a report on marketwatch.com.
“As Amazon has continued to thrive despite losing the obvious pricing benefit it used to have from not collecting sales taxes in its proprietary business, it remains to be seen if this new ruling will have any real impact on its third-party sales, or if the convenience for shoppers and growing benefits to Prime members will mitigate the pricing shift,” he said.
S&P Global Ratings said the news is positive for US state credit quality, even if the revenue benefits will be slow to emerge. The decision “will help stem state tax erosion in a changing economic environment,” S&P said.
S&P pointed to 2017 e-commerce sales growth of 15.9% while retail sales outside of e-commerce grew 3.4%. “We expect most states that impose retail sales tax to enact new legislation that require at least large out-of-state online retailers to collect sales tax at time of sale,” S&P said in commentary on the court decision.