Amazon's Dance With the Devil: Vol. 2

In part 1 of this article, I discussed some of Amazon.com's (Nasdaq: AMZN  ) recent controversial moves. Its price-comparison offer, for instance, has sparked criticism from everyone from author Stephen King to Sen. Olympia Snowe of Maine.

Let's look back at some of the Internet giant's earlier decisions that had both legislators and doctors crying foul.

Tax avoidance
In addition to the recent price-comparison stunt, Amazon has added insult to injury for traditional retailers by not collecting sales tax because of a loophole. Even chains such as Best Buy (NYSE: BBY  ) , hhgregg (NYSE: HGG  ) , and Barnes & Noble (NYSE: BKS  ) must charge sales tax on their Internet sales because of their stores' physical presence.

Currently, Amazon collects sales tax in just five states. After California passed a law requiring it to collect the tax earlier this year, the online retailer defied the state by refusing to collect and sought a referendum to kill the law. Since then, it has agreed to collect taxes starting next September.

The tide now seems to be turning in favor of taxing online sales, and Amazon has agreed to begin collecting sales tax in South Carolina next year, as well as some other states in later years. The Kindle-maker has also given its support to the Marketplace Fairness Act, which attempts to standardize online sales tax. However, one source believes its endorsement is based on a plan to profit from the law by charging merchants a processing fee of 2.9% of the tax collected.

Retail is a price-sensitive industry, and even if Amazon ends up collecting sales tax in all applicable states, its resistance thus far has given it a significant, and perhaps decisive, advantage.

Labor practices
A high-tech Internet company doesn't usually call to mind images of sweatshop labor, but Amazon's conditions at its Pennsylvania warehouse could be fodder for a modern-day Charles Dickens novel. A September report in The Allentown Morning Call detailed conditions at the warehouse that routinely included heat indexes over 100. Workers and even an ER doctor made several complaints to regulators, including one employee who said 15 workers had collapsed from excessive heat on a single day.

Another warehouse employee summed up his feelings by saying:

"Amazon.com has the most inhumane working conditions I have ever experienced. The people I work with want jobs, but they don't want to be treated like animals. Amazon.com treats people like animals."

The Pennsylvania incidents are not the first time Amazon has been accused of abusive treatment of its workers. In 2008, The Times of London reported that at one of its U.K. warehouses, Amazon had forced its employees to work seven days a week and punished them with disciplinary points for taking sick days.

The past is prologue
Those wondering about the consequences of such actions need look no further than Wal-Mart (NYSE: WMT  ) . As the big-box merchant has grown to dominate the retail landscape, it's received a range of criticism, from employment policies to predatory pricing to its effect on communities, resulting in negative media attention, a slew of lawsuits, and community resistance to new stores. Same-store sales have slowed over the past 10 years, and Wal-Mart's once-promising stock has been essentially frozen, hovering between $50 and $60 for most of the past decade.

Similarly, McDonald's (NYSE: MCD  ) stock price dropped between 1999 to 2003 as it struggled with issues such as the unhealthy perception of its food, epitomized by Eric Schlosser's book Fast Food Nation and the documentary Supersize Me. Though the overall market was down during the same period, McDonald's still significantly underperformed the S&P 500 (INDEX: ^GSPC  ) , losing more than two-thirds of its value from its 1999 peak after the company reported its first-ever quarterly loss at the end of 2002. The fast-food chain responded to the negative attention by eliminating its supersize offer and introducing salads, low-fat breakfasts, and nutritional labeling. Its stock has risen consistently since then.

Foolish takeaway
It may be tempting to argue that Amazon's tactics are simple free-market capitalism, acting in the best interests of shareholders. But public perception matters. The lessons of companies such as Wal-Mart warn of the dangers that lurk when any one of them abuses its power. For investors, this becomes especially meaningful when its stock is valued so highly.

At a P/E near 100, Amazon is priced as the company of tomorrow, expected to dominate electronic media and retail, but its recent tactics seem more reminiscent of an industrial-era robber baron than the dazzling Internet darling of the next generation. A backlash may be brewing. In the end, it will be consumers who decide whether Amazon rules the future, but as an investor, I'll be sure to stay away until then.

If you don't want to get burned by Amazon but are looking to get in on the next fast-growing retailer, check out this in-depth report on a company our experts are calling their "Top Stock for 2012." Even better, the report is totally free.

Fool contributor Jeremy Bowman holds no positions in the companies mentioned here. The Motley Fool owns shares of Google, Wal-Mart, Best Buy, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Wal-Mart, Amazon.com, McDonald's, Google, and hhgregg, writing covered calls in Best Buy, and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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