Amazon.com: Deep in the Heart of Texas and Taxes

Deep in the heart of Texas, e-tail giant Amazon.com (Nasdaq: AMZN  ) has given in to the tax man. Or in this case, the tax woman.

Texas history
Back in September 2010, Texas State Comptroller Susan Combs sent Amazon a big fat tax bill for uncollected sales tax spanning from 2005 to 2009 totaling $269 million. Amazon responded about five months later by shutting down a distribution facility it had in Dallas in an attempt to remove its physical presence from the state, which could help its tax battle. At the time, Combs estimated that the state was missing out on approximately $600 million per year from all untaxed online sales.

In the 10-Q filed along with Amazon's earnings release, Amazon outlines a settlement that it has recently reached with the state:

The State of Texas alleged that we should have collected sales taxes on applicable sales transactions during those years. While we continue to believe the assessment was without merit, in April 2012, we entered into a settlement with the State of Texas that included an agreement to collect sales taxes on applicable sales transactions for our US-focused internet retailers beginning July 1, 2012, resolution of Texas sales taxes up to that date, certain commitments related to capital investment and job creation in the state, and an immaterial payment to the state.

Source: 10-Q filed April 27, 2012.

As part of the settlement, Amazon has also agreed to rebuild new facilities in the state, which should create roughly 2,500 jobs over the next four years, in addition to beginning to collect sales tax.

12 down, 38 to go?
The news follows an agreement with California last year for a temporary reprieve in exchange for creating tens of thousands of jobs in the state, and the list of states continues to grow. As of right now, Amazon collects taxes in only five states, although it has come to terms with seven additional states to start collecting taxes within the next four years. That means that by 2016, Amazon will be collecting taxes in 12 out of 50 states.

On the bright side, as Amazon continues to build out its distribution infrastructure as part of these settlements, it should continue to improve shipping times and costs to customers and see additional operational efficiencies.

Brick-and-mortar retailers have always maintained that skipping out on collecting taxes has been a key competitive advantage for Amazon. Brick-and-mortar kingpin Wal-Mart (NYSE: WMT  ) was part of the organization that helped California score its tax win, the California Retailers Association.

Will Best Buy ever forgive me?
There's no doubt that Amazon has decimated big-box retailers like Best Buy (NYSE: BBY  ) , especially considering its recent announcement to shutter 50 stores. Best Buy is looking to cut costs by $300 million related to its retail stores by 2015. But ultimately, the sales-tax advantage that Amazon has thus far enjoyed is minor compared with its other strengths it has over its physical rivals.

More importantly, Amazon just plain has lower prices and better selection, which play a much larger role in trouncing the likes of Best Buy. I boycotted Best Buy long ago; as a Texas resident who will soon have to start paying state sales tax on my Amazon purchases, does that mean I'm going to go running back into Best Buy's big box arms for my non-Apple electronics needs now that Amazon's tax advantage is gone? Fat chance.

As Amazon's distribution footprint expands, it will probably begin to pass along those cost savings to customers and -- who knows -- maybe even make Amazon Prime even cheaper. It's already a steal for $79 per year, but if the company were to reduce the membership fee while improving its unlimited shipping to one day, now that's much more of a competitive advantage than skipping out on sales tax.

Back to the status quo
People are used to paying state sales tax. Allowing buyers to avoid them was the exception, not the rule. Combs said that building out facilities while settling with state tax collectors seems to be "part of [Amazon's] long-term strategic plan."

The list of states where Amazon collects taxes looks like it will continue to grow. While Amazon customers will increasingly begin having to pay the sales taxes that they're already used to, they still might even benefit from it as Amazon's service reaches new heights.

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Fool contributor Evan Niu has lived in Texas his entire life, and he usually rides his horse to the general store down yonder, hoping he doesn't get into a gunfight. He owns shares of Apple and Amazon.com, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Best Buy, Amazon.com, and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com and Apple, creating a bull call spread position in Apple, and creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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