Will Sales Taxes Tax Amazon?

Everybody does it. You've probably done it. Who can blame you, in this economy? You'd be dumb not to factor sales tax into a decision to buy from Amazon (Nasdaq: AMZN  ) instead of a bricks-and-mortar retailer. The savings approaches 10% in some places.

The other 1%
But we're supposed to pay sales taxes for online purchases. Yep, you're expected to track it, tally it up and send off a check. Who knew? A legislative analyst in California reports 1% of California consumers go to the trouble. (Really? They must be accountants.) The analyst estimates the other 99% owe the state $1.1 billion of uncollected sales taxes. That's more than 4% of California's $26.6 billion budget shortfall.

The good old days
When Amazon became a household word during the dot-com boom, bricks-and-mortar retailers weren't happy about Internet retailers' exemption from charging sales taxes. But the economy was booming and the Internet was beyond criticism. Bricks-and-mortar retailers' protests about unfair sales tax rules weren't as loud and fell on deaf ears.

The new new economy
Times have changed. Really changed. Bricks-and-mortar retailers are struggling, with many closing stores and some in bankruptcy. Their protests about unfair sales tax laws have gotten much louder. Sales taxes provide about one-third of states' revenue (aka, taxes). With states desperate for more revenue, retailers' protests are no longer falling on deaf ears.

The taxman cometh
Sensing an opportunity to use the state budget crisis to their advantage, large retailers are stepping up efforts to remove the Internet-only sales tax exemption. Wal-Mart (NYSE: WMT  ) , Target (NYSE: TGT  ) , Best Buy (NYSE: BBY  ) , Home Depot (NYSE: HD  ) , and Sears (NYSE: SHLD  ) are working with the Alliance for Main Street Fairness to change sales-tax laws in more than a dozen states, including the first and second most populous states: California and Texas.

The alliance formed about a year ago and recently claimed a victory with a new law in Illinois requiring that Amazon collect sales taxes if it employs marketing affiliates in the state. In response, Amazon quickly dumped its roughly 9,000 marketing affiliates in Illinois. That suggests Amazon believes sales taxes do influence shopping decisions.

Think that might have been just a coincidence? Amazon pulled similar maneuvers in Hawaii, North Carolina, and Rhode Island after those states passed comparable legislation. It's challenging a similar New York law in court. Furthermore, Amazon announced in February that it would close a distribution center in Texas, where the state comptroller claims Amazon owes $269 million in sales tax because of its physical presence.

Bricks-and-mortar retailers' pleas are reaching beyond the state level. Two U.S. senators are reportedly considering legislation to force online retailers to collect sales tax. This would run against the 1992 ruling in which the U.S. Supreme Court decided that only merchants with a physical presence (e.g., stores) in a state must collect sales taxes. At the time, Internet retailers did not exist. The ruling was centered on the direct-mail industry. With its eye on that ruling, Amazon collects sales taxes in just five states: Kansas, Kentucky, New York, North Dakota, and Washington (where it's headquartered).

The not-so-bearish case
Bears might argue that Amazon can't compete without this unfair advantage. I disagree. In my experience, Amazon's pre-tax prices meet or beat competitors. A recent Wall Street Journal article that compared prices at Amazon, Target, and Wal-Mart for a camera, a TV, and a PlayStation came to the same conclusion.

There's more than one reason to shop Amazon. It has great selection and customer service. Furthermore, many consumers prefer not spending time or gas money running around shopping for something that can be delivered free of charge. Bulls could argue that while many customers would be disappointed to pay sales tax on Amazon purchases, the company wouldn't lose that much business thanks to its selection, service, and convenience.

Foolish takeaway
Internet-only retailers' sales tax advantage appears to be dwindling and could disappear. Amazon is concerned enough about the possibility to spend time and money fighting it in court, suggesting they view this as a material threat.

That said, it would likely take years for a change to take place on a nationwide level. Investors would be well aware if a bill was winding its way through Congress or a case was on its way to the Supreme Court. Either could pressure the stock, but within limitations because of the uncertain outcome and plenty of time to take action.

Even if Internet-only retailers are forced to collect sales tax and Amazon's growth rate slows from the 44% analysts are projecting over the next three to five years, I'm willing to bet the company will still be the retailing winner.

More on Amazon:

Fool contributor Cindy Johnson hates to shop and finds it less painful at Amazon.com. She does not currently own shares in any of the companies in this story. Best Buy, Home Depot, and Wal-Mart Stores are Motley Fool Inside Value selections. Amazon.com and Best Buy are Motley Fool Stock Advisor picks. Wal-Mart Stores is a Motley Fool Global Gains recommendation. Wal-Mart Stores is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Wal-Mart Stores. The Fool owns shares of Best Buy and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.


Read/Post Comments (3) | Recommend This Article (3)

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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 April 13, 2011, at 10:01 PM, BeatriceV wrote:

    As you correctly point out, this is not a new tax. Consumers are supposed to pay the sales tax that is due when the seller does not collect it. The issue is the most efficient way to collect that tax. At the time of the Supreme Court rulings in 1967 and 1992, the court ruled that remote retailers should collect the sales tax, but at the time, doing so would be too complex and burdensome. Today large internet retailers easily manage millions of items for sale at any given moment, and even the smallest internet retailer can calculate accurate shipping rates to every corner of the country in a blink of an eye. It is no longer too difficult to keep track of a few thousand local jurisdictions.

    As part of the Streamlined Agreement, states have certified several companies to provide technology solutions to online merchants to make collecting sales tax easy. My company offers a service, called TaxCloud, that automatically calculates accurate local sales tax. It also prepares, files and remits the sales tax to the Streamlined states. TaxCloud is completely free to merchants.

    It is better that Congress address this issue so that all businesses collect the correct tax. Until then, more and more states are going to be attempting on their own to collect these taxes (through affiliate nexus laws and notification/reporting laws), which will increase complexity.

  • Report this Comment On April 14, 2011, at 8:15 AM, SpaceVegetable wrote:

    Baloney. There is no unfairness in not requiring a business that has no physical presence in a state (and thus receives no benefits from the taxes paid by the customers) to collect that state's sales taxes. Furthermore, any so-called price advantage quickly evaporates when you factor in shipping and packaging costs. Consumers nowadays are clamoring for free shipping, which means the retailer has to absorb that cost because UPS, Fedex, and the USPS certainly won't ship anything for free.

    I've heard this same spiel from TaxCloud before. Sure, it may be free now, but how long will that last? Is it "fair" to expect a small business to keep track of 8000+ tax jurisdictions with their ever-changing and varying rates and exclusions? Not to mention having to issue quarterly reports to all those jurisdictions. Times are tough enough for small businesses without adding such a heavy burden. It costs money to maintain computer servers and data to handle this kind of thing, and labor isn't free. You can bet the states won't be ponying up any sort of compensation for having these retailers do their work for them. They'd be better served by going after their own citizen scofflaws rather than risk the income tax revenue gained by marketing affiliates within their borders.

    Online retailers have plenty of other regulation and expenses to deal with already. They do collect sales taxes in locations where they have a physical presence, which is fair. Anything else is just the bricks-and-mortar business's way of putting one over on the competition and making it just one more thing to disadvantage small businesses over large ones (who have more resources available for such things).

  • Report this Comment On April 14, 2011, at 8:29 AM, 2064 wrote:

    I live in NY - amazon already collects taxes here. Hasn't stopped me from buying. I still save the gas, save the trip to a mall, get what I want delivered to my door. They haven't lost my business and The stock is making me money. I love these guys.

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