Online retailers- Death by tax or re-birth?
Nothing is more certain in this world than death and taxes, said Benjamin Franklin. How true. The glory days of online retailers in US who were able to deliver sales tax free goods will soon be over - marking an end to their price advantage over traditional retailers like Wal-Mart and Best Buy. Should the traditional retailers let out a sigh of relief? May be it is too soon for that, what with the biggest online retailer rising like a phoenix from the taxes...oops ashes.
Over 100 million of us shop on Amazon, knowing that buying a $100 gizmo at Amazon would be equivalent to spending $110 at a local Best Buy thanks to no sales tax on Amazon in most states. Amazon was able to pull that off by taking advantage of the 1992 US Supreme Court ruling that exempted online retailers from collecting sales tax from customers who resided in states where the retailer lacked a significant physical presence. Amazon carefully selected less populous states to set up their distribution centers- often under a separate legal entity - resulting in few people ever having to pay sales tax on goods purchased on Amazon. With the US online sales clocking over $200B last year (and projected to cross $360B by 2016), state governments are realizing their revenue losses and forcing Amazon to collect taxes based on not only physical presence of Amazon but also their business partners.
To illustrate, until few years back, Amazon collected sales tax in 4 states (Kansas, Washington, Kentucky and North Dakota) representing only 5% of US population. Alas for them, based on business partner presence, the taxman caught them up in New York, Pennsylvania, Texas & California. Now Amazon collects sales tax in states representing 35% of US population. In another 2 years, Amazon would be required to collect sales tax in totally 13 states that would constitute over 50% of the US population. If you reside in one of those 13 states, chances of which are 50%, you will no longer enjoy tax free shopping on Amazon- which would mean a $100 gizmo would cost you $110 on Amazon as well as the local Best Buy. So why would you now wait for days on Amazon if you are getting the same price at a nearby retailer?
Now here is the twist in the story. If Amazon has to anyway collect sales tax in a state because of business partner presence, they could as well build distribution facilities in that state. If they do that, logically (and logistically) speaking, by 2014, over half of their customers would be residing close to an Amazon warehouse- which means they can order something online and receive same day delivery. Amazon is doing exactly that- expanding their distribution facilities and bringing them right where their majority customers reside.
As per some industry pundits, this could be a killer move on part of Amazon that could kill one of the biggest advantages traditional retailers enjoyed over Amazon, that of instant gratification. If Amazon, or for that matter any other online retailer, could provide the ease of online purchase combined with the convenience of home delivery and the satisfaction of instant gratification, they could completely redefine the way we shop and completely re-wire the retail industry.
So is it death by tax or a re-birth for online retailers? Well, that depends on you. Would you reduce your online spending due to price increase or increase online purchases to enjoy same day delivery? Please leave your comment.
Comments
The cost advantage that Amazon has is not just because of tax. even with the tax, Amazon may be able to offer the gizmo at 103 or 104, since they dont have a front end expense (showrooms/associated fixed cost/staff salary) and much efficient inventory (due to it being centralized).
to your qn, if both online and traditional retailer offer at same price, i would prefer traditional retailer- for i can touch/feel what i am buying, use the experience of the sales staff and last but not the least, return may be easier.
Posted by: Perumal | September 27, 2012 4:31 AM
Nice article Venky! Whatever may be the end result, I must say that it's an impressive move from Amazon. Online retail has been evolving and this to me looks like the amphibian-to-reptile stage ;)
Posted by: Harsha | September 27, 2012 9:11 AM
I do not think this will make sense for govt to do it. This will hamper US economy. Making things expensive for customer and Amazon as they have to open more DCs for same day delivery. In that case customer will go a pick an item from a nearby store than ordering online. This will be booster for mortar and brick store. Buy BestBuy shares :)
Posted by: Swadeep Gupta | September 27, 2012 9:32 AM
Thanks Harsha. Yes, impressive and a bold move by Amazon.To build on your analogy, imagine how powerful a shark would be if it could walk on the land as well. Amazon is like that shark, which is as it is dangerous in its current (online) territory- but difficult to fathom the damage it could cause if it walked the land.. :-)
Posted by: Venky Ramesh
| September 27, 2012 9:07 PM
Perumal, how about the products you don't need to touch and feel and don't need sales staff guidance on and you buy on a fairly regular basis- think fmcgs like diapers? I agree to what you said for electronics..
Posted by: Venky Ramesh
| September 27, 2012 9:23 PM
Venky - good one and well analysed. But who will bear the cost of setting up these new stores / warehouses. So its comes down cost saved in shipping & customer experiences vs the new cost burden of setting these stores. May be SYSCO's RDC concept can play role here?
Posted by: mohan | September 28, 2012 9:59 AM
Mohan, good question. I think setting up new warehouses (there are no new stores) would be an investment, funded by the shareholder profits. However, the cost of operating these warehouses would be an added cost. I heard Amazon is heavily investing in the automation of these warehouses to reduce the operating costs. At the same time, for the last mile connectivity they are tying up with 7-eleven and cvs pharmacy- there would be an option to deliver at their stores where it would be stored in a locker, for which passcode would be provided in an email. Can they use SYSCO's RDCs instead of building their own? Well, that's a strategic decision for Amazon to make.
Posted by: Venky Ramesh
| September 28, 2012 1:15 PM