Amazon.com (NASDAQ:AMZN) was against an online sales tax before it was for it. Now that the Supreme Court has decided that states can require online retailers to collect sales taxes even if they don't have a physical presence in their state, smaller internet-only retailers trying to make their own mark are put at a disadvantage. Fortunately, that's a hurdle Amazon no longer has to worry about.
When Amazon was a lowly online start-up, a big part of its competitive advantage was its ability to beat the competition on price. Not charging sales tax contributed to its price advantage. Amazon used that leverage to grow into the internet behemoth we know today.
At the same time, it began constructing distribution centers across the country to be closer to its customers and facilitate timely delivery of products. As a result, it ended up with a physical presence in most states and had to collect sales tax anyway.
Just prior to the court's decision, Amazon was collecting sales tax from customers in 45 states and Washington, D.C., and said it favored a federal law allowing states to require sales tax collection by online sellers under a nationwide system. The Supreme Court decision effectively allows that to happen.
The taxman cometh
In South Dakota v. Wayfair, the state claimed that it was losing millions of dollars annually to businesses that sold goods online to its residents. The Supreme Court had previously decided that unless a business had a significant presence in a state, such as a store or a warehouse, the state could not force it to collect sales taxes.
South Dakota petitioned the court to reverse its previous Quill v. North Dakota ruling, so that the state could require companies like Wayfair, Overstock.com, and Newegg -- the three defendants in the case -- to collect sales tax from customers based in South Dakota. In a 5-4 decision, the court agreed with the state, saying its prior decision had created an uneven tax system.
In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State's consumers—something that has become easier and more prevalent as technology has advanced.
While technology may have progressed, it will still be a substantial burden to small businesses to comply with the tax policies of some 10,000 jurisdictions in the U.S. By contrast, compliance won't be a problem for Amazon because of its size and scope.
All roads lead to Amazon
Whereas price was once Amazon's biggest selling point, today it's more about convenience. Earlier this year, financial products marketplace LendEDU compared prices from Amazon and Walmart on 50 identical items across five product categories and found that Walmart was on average 34% cheaper than Amazon. The only category for which Amazon had lower prices was food.
What Amazon really excels at these days is having the greatest selection of goods available and getting them to you in the shortest amount of time.
Surveys show that about 55% of online shoppers begin their search for a product on Amazon, with 57% saying they always or mostly shop the site for their purchases. So pervasive is Amazon that it's cutting into Google's search dominance. Forrester Research says that the Alphabet division's share of search ad revenue has been declining and will continue to erode in the future.
The reason most people give for spending their time on Amazon is its free shipping through Amazon Prime, the gold standard for member loyalty programs. In April, the cost of a subscription, which also includes free streaming movies, music, and more, jumped to $119 a year. No other online retailer even comes close to the loyalty consumers show to Amazon. Last December, 76% of online shoppers said they would make most of their holiday-season e-commerce purchases on Amazon.com. Walmart was a distant second place, preferred by only 8% of consumers who shop online.
For all of these reasons, whether Amazon has to collect sales tax in a particular jurisdiction is inconsequential to its success. That's why it doesn't fear the recent Supreme Court ruling. Its rivals may not be so fortunate.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Wayfair. The Motley Fool has a disclosure policy.