A recent study from Ohio State University found that consumers in states where Amazon.com (NASDAQ:AMZN) began collecting sales tax reduced their spending on Amazon by 10% compared to states where Amazon does not collect sales tax. For purchases of more than $300, sales fell by a staggering 24%, with competing online retailers seeing a 20% boost in sales while brick-and-mortar retailers enjoyed a 2% increase.
This is certainly not good news for Amazon, but there is a silver lining. Third-party retailers selling through Amazon saw sales rise, since most of them don't charge sales tax. Amazon collects a fee from these sellers, and it also offers fulfillment services as an additional service, so Amazon still indirectly benefits from consumers shifting to third-party merchants. This is a loophole that would presumably be corrected if Congress passes federal online sales tax legislation, however.
The largest beneficiaries of Amazon collecting sales tax are likely to be traditional retailers with a significant online presence -- Best Buy (NYSE:BBY), for instance. Companies like Best Buy have always had to collect sales tax online since they have a physical presence in every state, and this has put them at a severe disadvantage to online-only retailers. The Ohio State study has shown that people shop where prices are the lowest, and Amazon's lack of sales tax gave it a roughly 5%-9% price advantage by default in many states. The days of tax-free e-commerce are likely coming to an end, and brick-and-mortar retailers with a strong online presence have the most to gain.
Why Best Buy will benefit
Part of Best Buy's turnaround effort is an intense focus on growing its e-commerce business. The company has revamped its website, started offering free shipping for orders over $35, and expanded its loyalty and rewards program. But more important, Best Buy now has a price-matching policy both in-store and online.
In states where Amazon doesn't charge sales tax, even this price-matching policy still leaves Amazon with an advantage. But in states where Amazon collects sales tax, Best Buy is capable of offering consumers the same after-tax price as Amazon. Amazon, along with all other online-only retailers with a limited physical footprint, has been taking advantage of this built-in advantage since the beginning of e-commerce. The Ohio State study has shown that this advantage really matters, and that the current situation is inherently unfair to companies like Best Buy.
All of these changes alone aren't enough to give Best Buy an advantage, though. What gives Best Buy an advantage in e-commerce is, ironically, its retail stores. Best Buy now ships online orders directly from its over 1,000 locations in the United States, leading to shorter shipping times and greater product availability. Along with the giving customers the ability to pick up their orders from their local store, often in the same day, and offering a simpler return process, Best Buy is becoming a more convenient choice.
Best Buy may benefit the most from Amazon collecting sales tax because it sells big-ticket items like TVs and PCs. Sales tax could be over one hundred dollars on an expensive TV or laptop, and that represents an enormous advantage for any retailer that doesn't collect sales tax. Amazon saw a 24% decline in big-ticket item sales in sales-tax states according to the study, and while some of these sales went to third-party sellers on Amazon, it's safe to assume that this may be a contributing factor to Best Buy's rapid online sales growth. Best Buy grew its online sales by 25.8% in the all-important holiday quarter, more than twice the rate during the same period in 2012, and it's likely that sales tax is at least part of the reason.
The bottom line
Amazon didn't become the dominant online retailer because it didn't collect sales tax – every other online-only retailer has had the same advantage. But traditional retailers with online operations have been at a severe disadvantage, and it seems that this may finally be on the verge of being corrected. The Ohio State study pointed out something that we already knew: Customers tend to search for the lowest price. But now we know that Amazon has had a real and significant advantage for many years, and the moment that sales tax is collected, a meaningful number of customers flee. So while sales tax certainly won't be the death of Amazon, it will make companies like Best Buy more competitive.
Timothy Green owns shares of Best Buy. The Motley Fool recommends and owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.