With the federal court ruling against Apple on a major e-book case—and the fallout that is certain to follow—retailers are going to have to take some hard looks at their digital content contracts. But of potentially greater impact was the court's unhappiness with so-called favored-nation clauses, agreements that a supplier or merchant won't sell their product to anyone at a price cheaper than you're paying. Months before the federal judge chastised Apple for the practice, German authorities beat up Amazon for doing the same thing.
Part of the problem is the changing face of retail. This was made clear this week when we were exploring the Marketplace Fairness Act (the proposed law that would theoretically force e-tailers to collect state sales tax) for a webinar. (By the way, that event is now available on demand.)
The interesting takeaway was how much sub-selling is impacting the law. The way many perceive the bill, it will force e-tailers to collect sales tax, but with the current bill (and in all of the variations that we hear being discussed), that's far from the case. Everyone points to Amazon as the big change. That is absolutely true. But Amazon's marketplace sellers—those huge number of small merchants selling anything and everything through Amazon—are overwhelmingly excluded due to an exemption for any site not making more than $1 million in annual revenue. And those marketplace merchants account for more than 40 percent of the goods sold on Amazon (which happens to be about 12 percent of Amazon's revenue). That's a non-trivial part of Amazon that is exempt.
Well, there are still the online arms of the major chains, right? The Walmart.com, Target.com, Macys.com and others. No, they're exempt, too, because they have had to collect that sales tax for years due to the stores giving them lots of points of presence. (To be precise, they only have to collect in states where they have stores or other facilities. For the major chains, that pretty much means every state.) What about EBay? Right, their merchants are mostly excluded due to the $1 million exemption. What about Rakuten, the global E-Commerce giant slated to make a major U.S. move late this year? Right, they only sell products from smaller merchants. Pretty much all-exempt.
Indeed, the National Retail Federation estimates that somewhere between 90 percent and—this is not an exaggeration—99 percent of E-Commerce sites would be exempt under the current proposed law. And there's discussion in the House with possibly increasing the size of that exemption, so as to get that 99 percent figure even higher. (Here's a tip, Congress people: Get the exemption up to 100 percent and you can put anything in the bill you want and no one will complain. Heck, you're so close to that now…)
In fairness, that one percent to ten percent of impacted E-Commerce sites represent a lot of dollars and a lot of sales. Ironically, the smaller sites that are being excluded are often the ones giving the most heartache to small physical chains, especially when the goods are higher-priced (such as jewelry). That's where local physical stores lose business and that's also where the difference of being able to offer goods tax-free can make a sale. (It's not tax-free, of course, as these shoppers certainly pay their states the taxes on their tax returns. Right? Even though the states have no way to know about the transactions? Honesty is still the best policy, no?)