Tuesday, June 12, 2012

Amazon's Sales Tax Issue

From Amazon's 2011 10-K filing: 

More than half our revenue is already earned in jurisdictions where we collect sales tax or its equivalents."  [But new state taxes] "...could result in substantial tax liabilities, including for past sales, as well as penalties and interest.

This will be interesting to watch over time with Amazon. The sales tax issue has the potential to create a Shleiffer Effect flash point in that so few people understand what it means to Amazon's business if (once) they are required to collect sales tax in all U.S. states. There exists a sentiment that it will curtail demand for Amazon products since consumers will no longer get the benefit of a tax-free subsidy, raising the price of Amazon products compared to traditional retailers.

So when the tax issue finally hits, there's a good chance that it produces an overreaction, a load of negative press, and a falling stock price drops. In other words, classic Shleiffer Effect and a buying opportunity.

Amazon's strategy has been interesting. Nothing short, actually, of brilliant negotiating born of dividing your enemies state by state. And I think it will continue: fight state by state attempts to force Amazon to collect sales tax, pushing for federal legislation that provides a blanket approach to collecting sales tax from online retailers as opposed to a patchwork approach. This buys Amazon time, helps it influence any such federal legislation (especially because Amazon will want it to include an amnesty provision that protects it from any historical liability for uncollected taxes), and allows Amazon to strike opportunistic deals on a state by state basis in which it will agree to collect those taxes in exchange for building distribution centers there.

One is reminded of old Br'er Rabbit. Please sir, please! Don't throw me into the brier patch! 

The coalition pushing so hard for Amazon to collect sales tax is likelyto get a mean taste of unintended consequences. When Amazon begins collecting in a state, it then has full liberty to build and run operations there as it sees fit. Its late-2011 deal to collect taxes in California allowed the company to immediately break ground on new distribution centers there, meaning it will soon be able to deliver its packages to San Diego, Los Angeles, and San Francisco much (MUCH) more quickly than before. 

These are huge and important markets for all retailers. I suspect Amazon had been serving them out of its Nevada and Washington fulfillment centers, and still getting pretty good two day turnarounds for delivery. The retailers pushing for the sales tax must now ask...what does it do to our business if Amazon can deliver packages overnight to our customers' doorsteps? What if having a dense network of fulfillment centers near these population centers means Amazon can deliver the same day?

Please, says Amazon, throw me into that sales tax brier patch.

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