investing

Should Amazon Fear the SCOTUS Tax Ruling?

Consumers might have to pay more taxes to shop online, making some investors in e-commerce stocks unnecessarily nervous.

Consumers are wondering whether they’ll have to pay more taxes to shop online after the Supreme Court’s recent ruling on internet retail. But what does it mean for investors in e-commerce stocks such as Amazon.com (AMZN, $1,730.20)?

In the long-term, not much.

The nation’s highest court handed brick-and-mortar retailers a victory on June 21 when it said states can require internet retailers to collect sales tax on e-commerce sales even if the internet retailer doesn’t have a physical presence in the state. Traditional retailers have been pushing for such a move for years. Indeed, the National Retail Federation, the industry’s trade group, took an extended victory lap on the news.

“The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well,” NRF President and CEO Matthew Shay said in a statement. “This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.”

What the Supreme Court decision doesn’t change is an inexorable shift in shopping habits.

The Trend That Really Matters

Brick-and-mortar retail still dwarfs e-commerce. Internet sales accounted for only 9.5% total U.S. retail revenues in the first quarter of 2018, according to the U.S. Commerce Department.

The issue for traditional retailers is that e-commerce sales grew 16.4% year-over-year in the first quarter, even as total retail sales grew just 4.5% year-over-year. So while brick-and-mortar is bigger than e-commerce now, it’s losing market share, and there’s no turning back the tide. Market researcher Forrester expects e-commerce to account of 17% of total U.S. retail sales by 2022.

Had state and local governments been allowed to require sales tax payments from online merchants, they could have collected as much as $13 billion for all of 2017, according to a report from the Government Accountability Office.

Those receipts might have made a big difference to state and local government, but they’re relatively small in the grand scheme of consumer spending. Total U.S. retail sales in the first quarter alone came to $1.3 trillion, with less than 10% coming from e-commerce. 

Besides, numerous internet retailers including Amazon, the largest e-commerce player by far, already collect state sales tax. That’s why analysts remain sanguine about its prospects.

“We do not believe the ruling will have an adverse impact on our e-commerce companies,” writes William Blair analyst Ryan Domyancic. 

The analyst, who has an “Outperform” (equivalent of buy) rating on AMZN, notes that the e-commerce giant already collects sales tax on first-party sales in the 45 states that have a statewide sales tax.

Amazon has been building fulfillment centers across the country for years, forcing it to collect state sales taxes as it expanded. “As it began collecting tax in more states, there was no indication its sales were negatively affected,” Domyancic writes. 

As for Wayfair (W, $114.28), which was a defendant in the Supreme Court case, the company’s ongoing expansion of its fulfillment network means it collects sales tax on 80% of its U.S. orders, William Blair notes.

“From our standpoint, it does not appear the collection of sales tax in incremental states adversely affected its growth over the past several years,” writes Domyancic, who rates Wayfair shares at “Market Perform” (hold).

Companies such as eBay (EBAY, $38.01) and Etsy (ETSY, $43.60), which host small businesses, face more uncertainty in light of the court’s ruling, since they would be responsible for collecting any sales tax.

The bottom line is that the secular shift toward online shopping remain the dominant theme in retail. Whether you’re a long-term investor in Amazon or a traditional retailer, little has changed. 

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
How to Calculate the Break-Even Age for Taking Social Security
social security

How to Calculate the Break-Even Age for Taking Social Security

When it comes to maximizing your Social Security benefits, there are many elements to consider. One factor that can be especially enlightening is your…
August 30, 2021
Spend Without Worry in Retirement
Financial Planning

Spend Without Worry in Retirement

Fears of running out of money prevent many retirees from tapping the nest egg they’ve worked a lifetime to save. With these strategies, you can genera…
August 30, 2021

Recommended

Investment Strategies for the 4 Stages of the Economic Cycle
Markets

Investment Strategies for the 4 Stages of the Economic Cycle

The U.S. economy is cyclical in nature, surging ahead and pulling back in waves over time. Investors’ portfolios need to change with the rise and the …
September 19, 2021
Kiplinger's Weekly Earnings Calendar
stocks

Kiplinger's Weekly Earnings Calendar

Check out our earnings calendar for the upcoming week, as well as our previews of the more noteworthy reports.
September 17, 2021
Hot Upcoming IPOs to Watch For in the Rest of 2021
Kiplinger's Investing Outlook

Hot Upcoming IPOs to Watch For in the Rest of 2021

The most exciting initial public offerings (IPOs) expected during the remainder of 2021 range from an Amazon-backed EV play to a food delivery app to …
September 16, 2021
5 Medtech Stocks to Seize Major Growth
stocks

5 Medtech Stocks to Seize Major Growth

The merging of healthcare and technology is changing how we care for our bodies. It's also creating investment opportunities, such as these five medic…
September 15, 2021