Wal-Mart's Quiet Tax Haven


It could be a classic case of the pot calling the kettle black. Wal-Mart, the world's largest retailer, has been attacking Amazon very openly for not collecting state sales taxes. But it turns out that they too have an online retail site that is not collecting sales tax on hundreds of thousands of items sold online.

The sales tax haven can be found on "Wal-Mart Marketplace," which has been up for a year on Wal-Mart.com.

"'It's a mini-Amazon.com," explains Brian Sozzi, retail analyst at Wall Street Strategies. "What's interesting is when this site launched, Wal-Mart neglected to mention the no sales tax component on Marketplace transactions."

The best example of this practice is a customer's Marketplace receipt, turned over to CNBC, where there is a bullet point that says "you'll never pay sales tax."

"This bullet point seems to be very in your face marketing of an undercover benefit to the consumer if you will, which to my knowledge is not done by Amazon," Sozzi said.

Between CSNStores.com, ToolKing, Shoebuy, Pro Team and eBags, approximately 215,230 items are sold through Wal-Mart Marketplace, which is known as an affiliate program. Wal-Mart is clear that it is not responsible for the handling order nor merchandise returns.

These mini-Amazon.com's, if you will, are gaining in popularity with major retailers. Best Buy recently announced its own marketsite and with online shopping trending stronger each year. Analysts like Sozzi say there needs to be more disclosure on these types of programs.

"This portion of the Wal-Mart.com site is a black box. You do not know who, if anyone is paying the sales tax. What is Wal-Mart getting financially from these affiliates to promote their goods on the site? How often is payment collected? Marketplace numbers need to be disclosed in Wal-Mart's 10-K. But then again, in order to do so, Wal-Mart would finally have to get with the times and disclose its online sales and profits," Sozzi said.

But not all analysts agree with Sozzi.

"We would not call Wal-Mart's Marketplace website a black box. Rather, the site is a means to offer consumers a broader and deeper assortment of products beyond the company's own offering. In other words, we see it as a means to leveling the playing field with Amazon.com," explained Dana Telsey, CEO and Chief Research Officer of Telsey Advisory Group, "Wal-Mart's, and virtually every other major brick-and-mortar retailer's, push for online sales tax collection is simply an effort to level the playing field with Amazon and others that offer lower prices largely because they are not collecting sales tax."

When CNBC.com asked the question of why Wal-Mart's vendors are not paying sales tax on the items being sold on their marketplace site, Wal-Mart Spokesman Greg Rossiter told CNBC: "The current state laws concerning direct online sales are pretty clear. Every online retailer with a presence in a state should be required to collect and remit sales tax on the items it sells to customers in that state. We collect and remit sales tax on every item sold by Walmart – in stores and online."

How does that square with the evidence of tax-free transactions on Wal-Mart's Marketplace? It seems that Rossiter was being very careful with his words. The tax-free items are sold on Wal-Mart's website but not "by" Wal-Mart, since they are really sold by third-party retailers approved by Wal-Mart.

At the present time, Rossiter explained Wal-Mart is currently working with one of its marketplace partners, CSN.com, to comply with California's new e-fairness law that requires state sales tax to be collected.

The battle for the buck among states has been heating up as state collected revenues have dwindled during the slow economic recovery.

This battle also falls into a grey area. While states believe they are entitled to collecting revenues, online retailers like Amazon.com are able to skirt around the sales tax issue because of a 1992 Supreme Court Decision Quill v. North Dakota where states can collect sales tax on online purchases only if the retailer has a physical presence in that state. States are also not allowed to impose taxes on interstate commerce because it is blocked by the Commerce Clause in the U.S. Constitution.

Internet sales currently represents 6 percent of total sales in the United States and is expected to reach roughly 8 percent in the next few years. According to SEC filings, overall e-commerce sales for Wal-Mart are $4.095 billion (1.0% of total sales) compared to Target's $1.330 billion (2.0% of total sales), Costco's $1.700 billion (2.2% of total sales) and BJ’s Wholesale of $51 million (0.5% of total sales).

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."