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There's heated debate going on right now about the compromise bill on what taxes are fair and what groups should (or should not) be subject to tax hikes if the Bush cuts are rolled back. There's another tax creeping up on us that will hit each of our pocketbooks more directly since it's tied to consumption: The internet commerce tax. As much as I hate giving more money to the government, I think it's fair, especially if you take into consideration the hidden economic costs of the status quo. And get ready for it folks, it's coming soon to a computer near you.

Consider this situation - Atmabus is looking to buy a Dyson vacuum for $399. It's the same price at both Best Buy and Amazon. At a 9% sales tax rate, my purchase is roughly $36 higher if I patronize my local Best Buy - a no brainer for me. The way the tax rules work - internet commerce is not taxed, historically because it's been difficult to establish jurisdiction. These sales have been viewed as interstate commerce; sales tax is governed by state and local authorities. Advantage: Amazon (NASDAQ:AMZN). Just Tuesday, Best Buy (NYSE:BBY) announced terrible earnings, citing market share losses. Certainly BBY's offline and online competitors are running faster than them; but the tax arbitrage situation has added fuel to the fire.

All things being equal, we're dissuading people from shopping at their local stores - a big economic cost to cities. It's one less sale to justify a new employee for Best Buy, and one less sale that circulates money locally (real estate, restaraunts, etc...). Also - the likes of Best Buy create more jobs than Amazon since their retail model is more labor intensive than e-commerce companies. So what is the cost ?

Amazon had sales of $25B last fiscal year (and growing), much of which had no sales tax applied to it. Assuming 90% of their sales were untaxed a 9% average sales tax rate, that would have generated $2B for state economies. Not enough to plug the California budget hole, but not pocket change either. And this is just one e-commerce company, imagine applying this logic to all online sales.

Best Buy generated $50B last year. It employed 180,000 full time employees. Amazon, which had half of Best Buy's revenue, employed a meager 25,000. For every dollar of revenue created by Amazon, it translated into 1/4 of the jobs than it did at Best Buy. Applying this ratio to Amazon's sales, this means 65,000 less jobs created. 65,000 less people with disposable income, paying payroll taxes, and circulating money locally. I know this is a bit of a generalization, but you get the point. Again, this is one example, imagine if you apply it more broadly.

I'm not saying that we should end e-commerce and source everything locally, but it doesn't make sense to give Amazon a competitive advantage when they clearly do not need one. Why should I have to pay $36 to my local Best Buy who employs people versus Amazon which does not? Given the pressure on local government agencies to find new sources of revenue, they will no doubt jump at e-commerce. Many states have already done so and many are planning on it.

So as I blogged about earlier, I told everyone to take advantage of the short-lived free services the net currently affords due to its nascency. I'd now also load up on all your Christmas gifts for the next several years to save another 9% that will hit in the years to come.

Disclosure: None