Amazon’s Big Weakness in the Supreme Court Sales Tax Ruling

source: TheStreet

As much as 0.3% of the retailer’s sales could be at risk following Thursday’s Supreme Court ruling, an analyst says. Inc. (AMZN) has been touted as barely touched by the Supreme Court ruling on state sales tax collection.

That interpretation, though, fails to evaluate the nuances of Amazon’s business model, one analyst said.

“Where [Amazon] is vulnerable is third-party sales, which accounted for 52% of units sold in the first quarter of 2018 (an all-time high),” wrote Tom Forte, an analyst at D.A. Davidson & Co., in a note on Friday, June 22. ” It is especially vulnerable because we estimate its third-party sales are a lot more profitable that its first-party ones.”

How much more profitable? Third-party vendors contribute 55% of their sales to Amazon’s contribution margins (gross margin less marketing expenses), whereas first-party sales put Amazon in the hole by 2.5%, according to D.A. Davidson research. The biggest contributor is Amazon Web Services at about 93%, followed by advertising at roughly 83%, the bank wrote.

Forte said one reason for the disparity between the two types of sales is that Amazon slashes prices so dramatically on its first-party goods, such as TV sets and furniture, to beat competitors that the margins are very low, whereas the commissions it earns on third-party sales adds up to higher margins.

First-party vendors sell wholesale directly to Amazon Retail, using the Vendor Central interface; once the vendor sends its inventory to Amazon, it controls the pricing, and the listing displays as “Ships from and sold by”

Third-party vendors sell to consumers using Amazon’s Seller Central interface, either through the vendor’s own account or a partnership with other third-party sellers that sell the vendor’s brand or product.

“We believe as much as 0.3% of Amazon’s sales could be at risk following the ruling. That number is based on multiplying its 2017 mix of North American non-Amazon Web Services revenue (59.7%) against our estimate of its mix of U.S. sales (90%) times our projection of its mix of third-party sales (13%) and our estimate for big-ticket sales on Amazon (5%),” Forte wrote.

Amazon posted $177.87 billion in sales in 2017, according to its annual report, putting the potential lost sales at $534 million.

Through the high court’s Thursday ruling in South Dakota v. Wayfair Inc., first- and third-party vendors are now on a level playing field. Central to the case was whether e-tailers must collect state sales taxes on purchases made through their sites even if the companies lack a so-called nexus in a state, such as having a warehouse or store there. In the decision, the Supreme Court upended its 1992 ruling, Quill Corp. v. North Dakota, that had held sway over sales tax collection for many years, and ruled that states can compel retailers to collect taxes on online sales even if the retailers lack a physical presence in the state.

Brick-and-mortar retailers have long complained they were unwittingly ceding business to online retailers that didn’t collect sales taxes on purchases. Government entities, such as South Dakota in this case, have missed out on sales-tax dollars through retailers such as Wayfair Inc. (W) , which lack a physical presence in most states, to the tune of some $8 billion to $33 billion annually, as noted in the Thursday Supreme Court opinion.

Amazon collects state sales tax where applicable on its own merchandise, but it doesn’t generally assess it on items shoppers purchase from third parties via Amazon Marketplace. The exceptions are Pennsylvania and Washington, for which it does collects sales tax on third-party Marketplace purchases made by customers living in those states.

Amazon declined comment for this story.

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