Opinion: Amazon Stands To Win Big From Marketplace Fairness Act

Nov 17, 2011 11:21 PM  By

Since the Marketplace Fairness Act was unveiled – which would create a constitutional framework for collecting sales tax online – I have received countless emails speaking to the “fairness” of the bill and how it would “level the playing field” for ecommerce retailers.

To me, “fairness” and “leveling the playing field” don’t spring to mind when one massive online retailer stands to profit far and away from its nearest competitors. Who, do you say, might that company be? Amazon.

It’s no surprise that Amazon – which had ducked proposed online sales tax measures in the past on a state-by-state basis – has embraced this bill. The online behemoth stands to win BIG if this bill becomes law!

Amazon will offer to handle sales-tax chores for merchants who sell products through its site for a fee equivalent to 2.9% of the taxes collected. The optional service, which is set to roll out Feb. 1, 2012, will be offered to Amazon’s third-party vendors in all 50 states.

Industry experts say this strategy could produce a veritable windfall for Amazon. Here’s how Abe Garver, a principal at Focus Investment Banking, explains it using a football analogy:
“There are brick and mortar, multichannel and web-only retailers on the field. Ten senators, led by Dick Durbin (D-IL), Mike Enzi (R-WY), and Lamar Alexander (R-TN), run out at halftime and hold up signs that read “Make Amazon Money – Act!” The cheerleaders gather around the bullhorns and the senators proclaim: “The field is now even because Amazon stands to get $116 million dollars of profit each year while all other retailers get nothing.”

OK, now how did Garver calculate his $116 million for Amazon?

Related Amazon.com Articles from Multichannel Merchant:
Amazon Supports Marketplace Fairness Act
Amazon.com Strikes Back on New York Tax Law
Will Amazon Win CA Tax Referendum?

According to Forrester Research, there will be $279 billion of U.S. Internet retail sales in 2015, which equals $70 billion of revenue to Amazon at current levels, Garver adds. “And 75% of that ($52.5 billion) is a target for third-party merchant tax collection fees which based on 7.5% would generate almost $4 billion of sales tax collected. Finally multiply $4 billion of tax collected times the 2.9% it gets to siphon from third-party merchants and we have — touchdown Amazon.com!”

Yes, that’s right, as of Feb. 1, 2012, merchants who sell through Amazon.com or through an Amazon-hosted ecommerce site can now opt to pay the company to collect applicable sales tax on their sales transactions for a fee for the service equal to 2.9% of what it collects in sales tax and any related transaction-based charges.

So Amazon will collect your sales tax for you and take nearly 3% of those transactions. Not a bad deal!

For nearly 20 years, online retailers have been safe from sales tax due to the 1992 Supreme Court case, Quill Corp. v. North Dakota, which said states are not allowed to require out-of-state companies to collect sales taxes unless that company has a physical presence, such as a store or warehouse, in the state.

Besides the potential huge benefits for Amazon, conversely, small online retailers will struggle to compete if the bill becomes law due to already thin operating margins.

The Amazon advantage is out there and has been recognized by several journalists. And what is the likelihood that the bill becomes law? Better than 50-50, according to industry insiders.

So, let’s dispense with the “fairness” of the bill and the “leveling of the playing field” arguments in support of the Marketplace Fairness Act and see it for what it is: The Amazon Marketplace Fairness Act.