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.)
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.
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