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Online sales taxes are coming

Tuesday - 9/18/2012, 11:19am  ET

A recent article by fellow Fool Sean Williams caught my eye because he was writing about eBay . As an avid eBayer (I think that's what we are called), I wanted to see why he thought “..eBay Could Head Even Higher.” The primary arguments that Sean put forth were: eBay's strength at their PayPal unit, which I've written about myself, and the continued strength in their marketplace business. One issue he brought up was that of taxes on online sales. He basically said that, “as long as online taxation of marketplace sales remains off the table, eBay will remain a strong buy.” For Sean and everyone else, if your reason for buying eBay or other online retailers is tax avoidance, buyer beware.

EBay is Doing Very Well:

Most people are aware of what eBay does. The company operates arguably the most popular online auction site, and PayPal is one of the most exciting payment platforms. To say that eBay's last quarter was impressive would be an understatement. The company's eBay marketplace business showed an increase of 8% in users and gross merchandise volume was up 14%. PayPal showed very impressive results with new users up 13%, and payment volume up 20%. With strong organic growth at both businesses, that should be enough of a reason to like eBay already. However, in Sean's article he said that, “The benefit of not paying taxes with online purchases is what drives such strong online marketplace growth.” If this is the case, then investors and customers are in for a rude awakening.

Taxes are Coming and Online Retailers Need to Accept It:

The bottom line for both eBay and Amazon.com is, both companies need to plan on sales taxes being a way of life in the future. The national average for sales taxes in the U.S. is 9.6%, and there are two bills gaining traction in Congress that will probably bring taxes to most online sales. Both bills would require online merchants to charge sales tax for purchases. The National Retail Federation estimates that local retailers are at a 6% to 10% disadvantage because of collecting taxes that online companies are not always required to charge. With struggling state budgets, taxing online sales will occur because of the massive amount of missed revenue. A recent USA Today article says that, “research from University of Tennessee shows states will miss out on more than $23 billion in revenue this year from uncollected taxes.” With $23 billion at stake, you can all but guarantee that online sales taxes are coming. With Amazon now on board and supporting this push, one of the main opponents to this issue has been removed. The fact that Best Buy , Target , and Wal-Mart all support this bill shouldn't come as any surprise, as all three are being directly challenged in this pricing war with online merchants.

Believe it or Not This Could Be a Good Thing For eBay and Amazon:

You might call me crazy, but I honestly think this could be good news for eBay and Amazon as their technological lead will likely bring smaller merchants to their services. If you think about it, both of these companies offer a way to sell goods and services using their web sites as a conduit to reach millions of customers. Both bills being considered have limitations on sales tax collection for businesses under a certain threshold of $500,000 or $1 million in sales. However, if you are a small business with say $2 million in sales, which would you rather do? Would you rather run your own web-site, set up the programming to make sure you are collecting taxes correctly for each area, and try to promote your product and sales through your own site? I don't think so. I believe what will happen is smaller retailers will nearly be forced to go to eBay or Amazon and set up their virtual storefront. Technology allows online retailers to figure taxes easily based on the billing address of the customer. Since every transaction requires a valid billing address, it's no longer a valid argument that this is too complicated.

This Also Would Be Very Good News For Physical Retailers:

Eliminating the sales tax difference would be a boon to physical retailers everywhere. If you are an investor in a company like Best Buy, this bill can't be passed soon enough. In the company's most recent quarter, their consumer electronics sales were down 9.6% and entertainment sales were down 22.1%. By contrast, Amazon's electronics and general merchandise sales rose by over 38% in the same timeframe. Just for point of comparison, a 40” Samsung LCD TV from Best Buy is currently $449.99 without tax, at Amazon that exact same TV is $446.44. Clearly this $3.55 price difference probably wouldn't be enough to make someone walk out of Best Buy and order the TV online. However, if you add the $3.55 price difference to the $27 worth of taxes that a Maryland customer like myself would have to pay, that might be enough to drive home and order the TV from Amazon. If you want this same item on eBay, there is an auction with about 6 days left where you might get it for as cheap as $439 without tax, but if you want a Buy It Now price you'll pay $447. As you can see, pricing is actually pretty close between the three, but when you figure in taxes the picture changes a bit.

Conclusion:

EBay holds a few advantages over Amazon and physical retailers assuming that online sales taxes come to pass. The first is, the company doesn't sell products, it gives sellers a platform to sell their items. This is why eBay's gross margin is over 70%, Amazon's margin is just 22.44%, and Best Buy comes in at 24.31%. The second big advantage for eBay is, individuals come to eBay to sell their goods, which in most cases would fall under the exemption and sales taxes won't come into play. Whether you are a stamp or baseball card collector, you like old coins, you need tickets to a football game or almost anything else, there is a good chance you'll find it on eBay. This is a competitive advantage that Amazon and physical retailers can't match. Last but not least, eBay's PayPal unit is moving into physical payments through tie-ups with Home Depot and other retailers. This should reassure investors that PayPal's growth should continue with or without online sales tax. While I agree that online sales taxes would remove some of the competitive advantage from online sales, eBay is positioned to continue to grow no matter how this debate is settled.

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This article was originally published as Online Sales Taxes are Comingon Fool.com

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