Seeking Alpha
Long/short equity, online retail, eCommerce
Profile| Send Message|
( followers)  

As an investment banker for the web-only retail sector and creator of the Web-only Retail Index, Seeking Alpha followers have asked me to keep them abreast of material developments in the effort to end tax-free Internet shopping.

Never in a million years did I think I’d be reporting this, but it appears that Amazon.com (NASDAQ:AMZN) just pulled a rabbit out of its hat on Wednesday, November 9, 2011.

Ten Senators, led by Dick Durbin (D-IL), Mike Enzi (R-WY), and Lamar Alexander (R-TN), have introduced a new Internet sales tax bill called the "Marketplace Fairness Act" or “Make Amazon Money Act” as I’ve renamed it.

The bill gives states broad authority to require that online sellers like Amazon collect and remit state sales taxes so that online and offline retailers all operate under the same rules. The Computer and Communications Industry Association (CCIA), a DC trade group which counts eBay (NASDAQ:EBAY), Google (NASDAQ:GOOG), Microsoft (MSFT%), and Yahoo (NASDAQ:YHOO) among its members, blasted the bill.

How does the bill help Amazon?

U.S. Internet retail sales topped $176 billion last year and are expected to reach $279 billion by 2015, according to Forrester Research Inc.

According to Internet Retailer magazine, Amazon will offer to handle the sales tax collection process for its third-party merchants in exchange for 2.9% of the tax collected.

This means that Amazon would gain a money printing machine. Amazon's new offer is aimed at hundreds of thousands of independent U.S. businesses, ranging in size from tiny used-book sellers to major manufacturers, that sell their products through the Amazon.com site.

Over the past twelve months Amazon has posted revenue of $43.6 billion dollars. Nearly 40% of the merchandise sold worldwide by Amazon comes from third parties that use the company's Internet platform to do business.

It has been estimated that about half of those sales required Amazon to collect sales taxes or value-added taxes from U.S. and foreign buyers. Under the Marketplace Fairness Act would grow significantly.

Assuming $279 billion of U.S. Internet retail sales in 2015, Amazon could have $70 billion in revenue running through it’s platform. Let’s assume 75% of that ($52.5 billion) is a target for third-party merchant tax collection fees. Let’s further assume that sales tax is 7.5%.

What's the outcome? $116 million dollars of new annual revenue (2.9% of $4 billion) may end up in Amazon’s checking account as a result of the Marketplace Fairness Act.

Recent efforts

As I reported previously in Valuations Of Web-Only Retailers Could Drop 25% Sen. Dick Durbin has been championing a related effort dubbed Main Street Fairness Act for several months.

The justification for the measure is the claim that Amazon.com, Overstock.com, Blue Nile, and other online retailers such as those in the Web-only Retail Index (below) that don't collect taxes are unreasonably depriving states of revenue, and that they enjoy an unfair competitive advantage over local retailers that must collect taxes.

click to enlarge

NetChoice.org's Executive Director Steve DelBianco says, "The SST Cost of Collection study found that a small business spends 17 cents for every tax dollar it collects for states. Even if SST software works as promised, that only helps with 2 cents of the 17 cents in costs per dollar collected.” That leaves small businesses with a 15% cost burden on every dollar they collect.

As always my purpose is to share actionable investment commentary. Based on my judgment as a banker in the sector I believe the Marketplace Fairness Act would have a significant impact on valuations and investors should be on alert.

How would an abrupt end to tax-free Internet shopping impact Internet retailers?

  1. Near Term Revenue Dip - Revenue in the sector is expected to fall between 10.0% and 13.0% in the short run based on detailed data from one retailer and three earlier studies.
  2. High Ticket Items Hit Hardest - Revenue may decline more than 13% for Internet Retailers with high average ticket orders where the online tax savings have been substantial, and more than offset by freight costs and delivery time (e.g. top-tier consumer electronics and jewelry).
  3. Collection Cost is Real - The cost of collecting tax (as a % of collected tax) will range between 13.5% for small retailers to 1.5% for large retailers.
  4. Consolidation of Healthy Channel Players - Large strategics will likely accelerate their acquisition of smaller retailers whose margins are impacted the most by the cost of collecting state and local tax.
  5. Thin and Getting Thinner - Many smaller internet retailers will find it almost impossible to compete if the new rules take place due to the already thin operating margins becoming almost non-existent.
  6. Valuations Falling - Depending on a host of factors (e.g. magnitude of revenue declines and increased collection costs), we expect valuations of Internet retailers to fall by as much as 25%.
  7. No Dance Partners – Even those that can marginally compete are likely to find that large e-tailers no longer find them as attractive due to the new competitive burden placed upon them. Those smaller e-tailers that were at one time hoping to exit at a premium may be disappointed in their ability to even find buyers for the business.

Web-only Retail Index companies include Amazon (AMZN), eBay (EBAY), O.co (also known as Overstock.com) (OSTK), United Online (UNTD), Vistaprint (VPRT), 1-800-Flowers.com (FLWS), Nutrisystem (NTRI), Blue Nile (NILE), U.S. Auto Parts (PRTS), Vitacost (VITC), PedMed Express (PETS), Coastal Contacts (CSOAF.PK), Bluefly (BFLY) and Stamps.com (STMP).

Source: 'Make Amazon Shareholders Money' Act: 10 Senators, Wal-Mart, Others Duped Into Support