E-Commerce Sales Tax Ruling A Non-Starter For Online Retail ETF

The Supreme Court of the United States last month ruled in the case of South Dakota vs. Wayfair W that states could force retailers based in other states to pay sales tax on purchases made by residents of the states where the retailer is not based.

To clear that up using a hypothetical example, the Supreme Court ruling clears the way for, say California, to collect sales tax on Amazon.com Inc. AMZN products sold in California. Amazon, the largest U.S. e-commerce company, is based in Seattle.

What Happened

The Supreme Court ruling hasn't been problematic for the Amplify Online Retail ETF IBUY, the first exchange traded fund dedicated to online retailers. While IBUY did see some late June selling pressure, the fund resides less than 1.5 percent below its all-time high.

Year-to-date, IBUY is up 29.1 percent, or more than triple the returns posted by the brick-and-mortar heavy SPDR S&P Retail ETF XRT.

The Supreme Court ruling “reverses the 26-year precedent that exempted retailers from collecting sales taxes on purchases if the seller did not have a physical presence in the state,” said Markit. “Up to this point, online retailers were not required to charge consumers a sales tax on remote (out-of-state) sales, unless that retailer had a physical presence in the state in which the buyer was located.”

Why It's Important

One of the simple reasons why the South Dakota vs. Wayfair hasn't been a big deal for IBUY and its components is the expanding reach of online retailers. Meaning many of these companies already have operations (call centers, warehouses, etc.) in states where they aren't headquartered.

“The 'physical presence' requirement means that large online retailers with as little as a few customer service representatives or a single warehouse in a state still must collect a sales tax for orders from that state,” said Markit. “Given how widespread the distribution networks have become, the largest online retailers have a presence in most of the states that collect sales taxes, and thus are already complying as if they were brick-and-mortar retailers.”

As of 2017, 80 percent of the sales tax revenue from online sales was already being collected, according to the Government Accountability Office (GAO), said Markit.

What's Next

There is a gray area for retailers such as Amazon and eBay Inc. EBAY, both of which are IBUY holdings, that operate online marketplaces. These marketplaces match buyers and sellers from various locations and could be lucrative tax streams for state governments.

“The GAO estimates that, at most, one-third of these marketplace transactions currently includes sales taxes. Given that these types of sales are estimated to account for over $200 billion of Amazon's worldwide transactions, the potential benefits to state governments are nontrivial,” according to Markit.

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