Amazon Continues to Roll Out Sales Tax in the U.S.

Every few years, it seems that e-commerce giant Amazon.com  (NASDAQ: AMZN  )  rolls out a new product. This year's biggest product launch at Amazon might just be sales tax.

As an online retailer, Amazon has historically been exempt from collecting sales tax in most states. However, that's changing fast. During 2012, Amazon started collecting sales tax in three new states: Texas, Pennsylvania, and California. This was a crucial watershed, as it more than tripled the number of U.S. residents from whom Amazon collects tax, from less than 35 million to around 110 million!

In the past eight months, Amazon has started to collect sales tax in several more states. The imposition of sales taxes removes an important advantage vis-a-vis physical retailers and could potentially lead to a slowdown in Amazon's growth.

Change in tactics
For years, Amazon fought against a variety of attempts by states to force it to collect sales tax from its customers. Since late 2011, though, Amazon has taken a different approach. The company now supports a piece of legislation called the "Marketplace Fairness Act" which would allow states to compel online retailers with more than $1 million in annual revenue to collect sales tax.

However, while the Senate passed this bill back in May, the House has not acted on it yet and the bill ultimately may die. Meanwhile, Amazon has been cutting deals with a variety of states. Generally speaking, Amazon has been agreeing to collect sales taxes and add jobs in return for tax breaks.

The count grows
The number of states in which Amazon collects sales tax has been growing by leaps and bounds since mid-2012. In June 2012, Amazon only collected tax in five states: Kansas, Kentucky, North Dakota, New York, and Washington. Since then, Amazon has begun collecting tax in Texas, Pennsylvania, California, Arizona, New Jersey, Georgia, and Virginia. (The last two were just added to the tax-collection roster on Sunday.)

Amazon Sales Tax Collection by State and Year (courtesy of DIY Maps).

As the map shows, Amazon will also begin collecting sales tax in Massachusetts and Connecticut later this year. Nevada, Tennessee, and Indiana are all set to begin "Amazon taxes" in 2014. In a few states like South Carolina and Florida, Amazon has deals in place to roll out taxes as late as 2016.

Will it matter?
Analysts are divided in their estimates of the impact of charging sales tax on Amazon's business. Many appear to believe that charging tax has a negligible impact on Amazon's sales. Others argue that the imposition of sales taxes significantly changes the competitive dynamic between Amazon and its brick-and-mortar competitors.

Thus far, the data is inconclusive. In the first half of 2013, Amazon posted 30% growth in North America for the "electronics and general merchandise" segment, which includes most of the big-ticket items where sales tax could be particularly significant. Clearly, Amazon is still growing rapidly. However, the company posted even stronger growth of 43% in North America for that segment in the first half of 2012!

In other words, while Amazon is still growing quickly, there was a noticeable year-over-year slowdown. Macroeconomic factors and market saturation probably also played a role. Still, it seems likely that the imposition of sales tax in more states is having some effect on sales.

Foolish bottom line
Personally, I'm skeptical of the argument that charging sales tax will have no impact on Amazon. Obviously, sales-tax avoidance is not the only reason people buy from Amazon: Amazon often has the lowest price for an item, and many consumers find it very convenient.

That said, to argue that a 5% to 10% difference in price has no impact on consumer behavior would imply that most people don't care very much about price. That does not seem very plausible; after all, one of the major reasons people shop Amazon is to get a lower price.

As Amazon continues to roll out sales tax to more states, its sales growth trajectory may continue to flatten out. Yet Amazon investors are clearly betting on a long period of growth; the stock trades for 100 times forward earnings. If sales tax drags down the growth rate by just a few percentage points, it could trigger a significant correction in Amazon stock.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century, and Amazon.com has been front and center. Investors who understand this changing landscape should be well positioned to profit. Luckily for you, The Motley Fool has released a special report on the 3 Companies Ready to Rule Retail. Uncovering these top picks is free today; just click here to read more.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 03, 2013, at 7:23 PM, malclave wrote:

    Amazon is not "charging" sales tax. The states are. Amazon is merely collecting it at the point of sale, so it's harder for people to cheat on their taxes.

  • Report this Comment On September 03, 2013, at 8:12 PM, ScottAtlanta wrote:

    Many times I've stood in a box store and "remembered" that the price is 8% higher, at least, if I bought it now...so I put it down and added the item to my Amazon list. Feeling guilty about not contributing to local economy but saving money.

    Today, for example, I was in a box store and the pattern had reversed. I had searched prices on Amazon, but thought I'd buy later....then saw the prices were competitive at the box store for similar items. Sales tax, no longer in equation. Easier return of merchandise now makes local buy more sense. So I bought the items, instant gratification, no guilt...or just minor guilt about the politics of the box store owner.

    I don't think this bodes well for Amazon's razor thin margins....the stock price will drop. I will buy. B/c Amazon will continue to grow and will likely innovate elsewhere.

  • Report this Comment On September 03, 2013, at 8:18 PM, fool2ool wrote:

    amazon is for the market place fairness act because they have to be not because they want to be. They will be forced to collect tax regardless of what the think about it. For amazon it would only be "fair" if there were not exemption. Any m.f.a. that passes with an exemption does not help amazon. That would likely hurt them if it were a sizeable exemption. Amazon gets immediate benefits from states where it collects sales tax. In the short term it may be smart for them to collect tax. in the long term it limits growth. Isn't "growth" why this stock is priced at such lofty valuations? Seems pretty simple to me. The downside is more probable and greater then the upside for amazon. It was the same when amazon traded at 200$. People keep calling it a ticking time bomb while analysts love it. Similar thing happen to Netflix not too long ago. I predict amazons chart will look similar to netflix chart following the implosion but for all the right reasons. I am not a fortune teller by trade.

  • Report this Comment On September 03, 2013, at 8:42 PM, fool2ool wrote:

    I think their prospects for export growth from both direct and indirect is becoming slimmer as a result of the f.m.a. Both direct and indirect exports are not growing as expected for amazon. A sizeable chunk of their domestic sales are destined for freight forwarders reshipping overseas consumers. Overseas customers love to buy online and get expensive products forwarded to the and they love to use amazon. Just as a currency play alone it is worth it for foreigners to shop in America (well it used to be, dollar is slowly rising) not to mention the CHEAP price that amazon is known for. If amazon is forced to collect tax everywhere in usa it shutters their indirect export business. I know millions of their customers will shift to vendors who are flying under the 1 million dollar exemption. I am trying to find a reason why amazon wants to collect tax other then "we will deliver ALMOST instantly" and I am drawing a blank. In the long term the f.m.a. at the very best means limited or stunted growth for amazon. Where do lofty valuations go when the potential growth of a growing company is under question? Unless they have plans to deliver "stuff" like its a hot pizza i don't see how a warehouse in every state will help them compete against their competitors who already have established brick and mortar in the same states? I have read all the yay and nay sayer articles. Does anyone know how much of amazons direct and indirect sales are export driven? its a giant business for them considering their export bound sales exploded particularly under the weak dollar and no sales tax tail wind which are both becoming headwinds slowly but surely.

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