The Supreme Court has been active in creating revenue opportunities for states, as in legalizing sports betting and most recently in facilitating the collection of online sales taxes. The White House has floated the idea of reorganizing the U.S. Postal Service, but we think this endeavor represents more of a tail risk for Stamps.com than anything else. Though we expect smaller online retailers to feel some pressure as a result of the online sales tax ruling (Amazon already collects online sales taxes), we don’t think the ruling, while leveling the playing field for some brick-and-mortar retailers, will change the fate of many aging department stores such as J.C. Penney and Sears, both of which may not make it to the other side of the next downturn with shareholder capital intact.
By Brian Nelson, CFA
What has been a boon for expected earnings and free cash flow generation from the recently-implemented corporate tax cuts may in part be offset at some smaller online retailers by a recent Supreme Court ruling that overturned a 26-year-old precedent that said businesses that didn’t have a “physical presence” in a state need not collect sales taxes there. The 5-4 ruling issued June 21 (see here) against Wayfair (W), Overstock (OSTK), and online retailer Newegg, specifically, may indicate that Internet retailers may eventually lose one of their biggest cost-advantages against brick-and-mortar rivals. Though we view this as a landmark ruling, we’re not making any changes to the fair value estimates of companies in our coverage at this time.
For starters, we think some of the relatively smaller online retailers lacking significant scale may likely be hurt the most. On the other hand, we’re not expecting much in the way of an impact at Amazon (AMZN) or eBay (EBAY), which have greater means to extract cost synergies across their operations and drive retention (free shipping, Prime Video) more so than smaller players. Amazon, for example, has already been collecting sales taxes across the country since April 2017. We also think the Supreme Court ruling helps the brick-and-mortar retailers, especially in creating a more level-playing field with respect to their online initiatives. The ruling may also serve to stymie potential new entrants from leaping into the e-commerce arena due to the higher tax bill, which raises the price of their products to consumers.
That said, we don’t think the consumption pattern by consumers will be altered due to online sales tax collection, as the value of convenience is something that cannot be underestimated. Said differently, we doubt consumers are going to pursue a wholesale change with their buying patterns because of a 5-10 percentage point increase in the bill from sales taxes. Remember, Amazon is already collecting sales tax, too, so there won’t be much of a catalyst at the top, per se. Likewise, the impact on payment processor PayPal (PYPL) and the credit-card networks such as Visa (V) and Mastercard (MA), for example, may be muted. E-commerce proliferation is here to stay, and we don’t see much that will derail the rapid pace of digital expansion anytime soon.
As with the recent ruling to legalize sports betting, we think the Supreme Court decision supporting the collection of online sales taxes will only help state tax coffers, perhaps lessening the burden on federal support, which may be hampered considerably as a result of capital-expensing provisions and the vastly reduced rate within the new corporate tax code. In some ways, investors may want to see higher taxes on the state level, as it may reduce sovereign credit risk and the ongoing pace of the rise in interest rates (SHV, SHY, IEF, IEI), which have been pronounced in recent months. Though a restructuring of the U.S. Postal Service, “including the possible privatization of mail delivery” may impact delivery and shipping logistics at some online retailers, such a proposal represents, in our view, more of a tail risk for Stamps.com (STMP) than a massive headache at the online retailers.
All in, we’re viewing developments with respect to online sales tax collection and the possible restructuring of the U.S. Postal Service as relatively non-events, but perhaps generating material risk for Stamps.com. We still don’t like department-store retail, namely J.C. Penney (JCP) and Sears (SHLD), and we believe these two in the group may not make it to the other side of the next recession without wiping shareholders clean. The political and regulatory landscape will always be in flux, and we’re not doing much with our fair value estimates as a result of the news. We may seek to widen our fair value estimate range on Stamps.com, however, but we already feel shares have run up too fast.
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.