One of the best things about Seeking Alpha is how interaction with readers can help us all to refine our research and thinking. My recent article about pending developments for the MFA (Marketplace Fairness Act), focused on Amazon (NASDAQ:AMZN) and its upcoming earnings report. However, I think it was apparent that the legislation will have a large effect on all retailers whether online, like eBay (NASDAQ:EBAY) and Overstock (NASDAQ:OSTK), as well as some less obvious examples like Blue Nile (NASDAQ:NILE) and 1-800-Flowers.com (NASDAQ:FLWS) or brick-and-mortar retailers like Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and hundreds of others. This article will focus on the broader effects of the MFA while documenting and quantifying a point which I thought was already obvious: that sales tax collection is important to all retailers.
Some readers pointed out a sales map from the ILSR (Institute for Local Self-Reliance), saying that Amazon collects sales tax in 21 states and from ~60% of the population. I did not link to ILSR because that map and data are a little ahead of things for my purposes. For instance, it counts South Carolina as amongst the sales tax states, but Amazon will not actually even begin to collect for that state until 2016. Of more importance is Florida, where Amazon only began collecting towards the end of the quarter being reported. My purpose was not to bash Amazon, nor is it to document the current state of affairs in detail, since that's clearly a work in progress. It was simply to point out an imminent development that is getting virtually no other press in the investment community.
Responses also indicated that many readers misunderstand or underestimate the effects of both the current online tax situation and the proposed changes. While I think the effects of the MFA will be gradual and long-term rather than instantaneous, the latest research is unequivocal about the sales tax advantage that has been enjoyed by online retailers. A paper by Ohio State University researchers indicates that sales accruing directly to Amazon fall by almost 10% in states where tax is charged, and sales of big ticket items (over $300) fall by 24%. In an interview with Bloomberg, one of the authors states, "There is no ambiguity. It has been their competitive advantage."
Again, my purpose is not to bash; I think this study may overstate the effect, since the data is from 5 states where Amazon does collect tax, and at a time when non-taxable options are still easily available. This viewpoint is supported by the research, in that other online retailers (which were not yet collecting tax?) in the states tracked *gained* 20% in sales when sales tax went into effect for Amazon. Further, many items can still be bought through Amazon Marketplace, where a retailer pays them a fee to sell through Amazon, but doesn't necessarily charge tax. Big ticket items with this setup saw a 61% rise in sales. So the current mess can actually be a big benefit for Amazon, whereas the MFA is a broader, more fundamental change in how taxation is implemented by states.
So what are the broader effects of the MFA? I classify them in 3 categories:
- Pure e-tailers have the most to lose. There is really no question that tax avoidance has been a competitive advantage that is likely to go away sooner or later. An even more recent study than the one cited above reaches the same conclusions. This category includes Amazon, but the situation is probably far more dire for its smaller competitors like Overstock, and Blue Nile. Outfits in this category deserve further examination as short candidates.
- Conventional retailers have the most to gain. This is particularly true of those who can successfully implement the "brick-and-click" model that combines online shopping with physical stores. While the sales tax issue seems quite certain, I think the advantages of online comparison shopping, combined with delivery or local pickup and return are equally obvious. Wal-Mart is tops in this category, but other tickers include Best Buy (NYSE:BBY), Target, hhgregg (NYSE:HGG), and Staples (NASDAQ:SPLS), to name a few.
- "Destination stores" will be least affected. Think Macy's (NYSE:M) and high-end fashion stores for this category. Whenever shopping is primarily an experience or a social activity, the factors detailed in this article become far less applicable. Similarly to the extent that a merchandiser focuses on last-minute sales, like Lowe's (NYSE:LOW) and Home Depot (NYSE:HD), the effects would be muted.
As detailed in my prior article, sales tax change is coming, with a major step forward possible in a matter of days. While there is no real question that sales tax avoidance has been a competitive advantage to e-tailers, the specific effects of sweeping change will be varied and dependent on details of the implementation. Long investors ignore these issues at their peril, and the timing may be right for short opportunities in pure e-tailers.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a short position in AMZN, NILE over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.