Taxes Can Clobber Amazon's Sales, but That Doesn't Matter

Those who didn't rail against Amazon.com  (NASDAQ: AMZN  ) for its incredibly expensive P/E ratio always had another argument: What happens when Amazon.com finally starts collecting sales tax? Although this has been a main differentiator for years versus brick-and-mortar retailers, Amazon's tax-collecting agreements with various states are now coming into effect.

And the Amazon bears were right. Customers buy less from Amazon, significantly less, when taxes are included. Even so, it doesn't matter. Why? Because even if customers don't buy from Amazon, they buy through Amazon.

The ubiquitous Amazon.com shipping box. Source: Flickr user Carl Malamud

Tax implications
A study (link opens PDF) from researchers at The Ohio State University of about 250,000 households, including those in states that began imposing a sales tax, found that Amazon sales declined 9.5% after a tax was introduced. Worse for Amazon, purchases above $300 fell almost 24%. As questions about Amazon Prime's sustainability swirl, like the cost of repeatedly shipping low-value items in two days, the effect of taxes reducing large spending could further hurt profitability of the service. Amazon raised the price of Prime to $99 from $79 in March.

And seemingly worrisome for Amazon, these lost sales go to others. After a tax was imposed, the study found, local brick-and-mortar retailers experienced a 2% increase in sales, and competing online retailers experienced a nearly 20% increase in sales.

But who are those other online retailers?
While a 20% bump in competitors' sales seems scary for Amazon and its investors, a majority of those "competitors" sell through Amazon. In fact, Amazon Marketplace sales increased 15% after a tax was enacted. Sorting out whether this Marketplace growth would have occurred regardless is difficult, but it does mirror the rise in sales for other online competition. And it's important to note, Marketplace sellers do not collect sales tax, even though they may employ Amazon to fulfill the order.

The amount that Amazon charges sellers to use its platform varies greatly based on what item is sold, with fees usually between 8% and 15% of the sales price, though they can be as high as 25% for Kindle accessories. There is also a $40 monthly fee for a higher tier of Marketplace accounts, allowing sellers to avoid a $1-per-item fee and sell a wider range of goods.

And an even smaller worry in the future
Amazon has been the states' target for taxes as it is so high-profile. As legislation catches up to practice, governments will craft laws that apply equally to all businesses instead of negotiating with company after company. This means that even Marketplace sellers will have to collect tax, and once the tax laws are levied for all, this slight avoidance of Amazon purchases will be a short-term blip.

Such legislation, like the Marketplace Fairness Act of 2013, which would allow states to collect sales tax from out-of-state retailers and which Amazon supports, passed the Senate last May and now awaits the House's action.

While taxes present a short-term issue for Amazon, customers are simply buying through Amazon instead of from Amazon. And either way, Amazon makes money.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.


Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2926175, ~/Articles/ArticleHandler.aspx, 11/29/2014 12:37:22 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement