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TMFDeej (99.47)

The Government is inventing new ways to get your money. Time to short Amazon?

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April 23, 2008 – Comments (9) | RELATED TICKERS: AMZN

Shares of Amazon.com (AMZN) have been on quite a roll lately, surging from the low 60s at the end of February to today's close of $81 (with an eye-popping P/E ratio of 69).  I came across the following article this afternoon and it got me thinking about the future of on-line retailers: State tax man is taking on Amazon.com.  The premise of the article is that New York state is going to start charging sales tax on Internet purchases starting June 1st.  I hadn't heard this before, so I did some additional research on the subject and came up with this: Tax law may cause problems for online business. 

Apparently the Federal government is considering getting in on the act as well.  A newly proposed law called the Streamlined Sales Tax Project would require businesses that sell stuff on-line to charge a sales tax in every state where they do business.  If I am not mistaken, on-line retailers currently only have to charge sales tax on sales to people who live in states where they have physical operations.  I don't know whether the proposed law will pass, but it seems to me as though the chatter about charging sales tax on purchases through on-line retailers is growing louder.  Even if the federal law doesn't pass, several states may end up jumping on the bandwagon.  I'm not surprised that the government is looking for new ways to generate revenue given the strong possibility of declining tax revenue.

If the charging of sales tax on on-line sales becomes commonplace this will be a major negative for companies like Amazon.  Not only will people have to pay for shipping on Amazon purchases, but they now will have to pay sales tax as well.  I've always felt that one of the nice things about buying stuff on-line was the fact that the shipping costs and sales tax savings were often pretty much a wash.

This doesn't even get into the fact that one would think that shipping charges are going to continue to rise if oil settles up here at the $118 level, or even goes higher.  Or the fact that I strongly believe that higher food and fuel costs are going to put a significant damper on consumer spending on discretionary items like a number of the things that Amazon sells.

I'm not going to short Amazon in real life.  That's not how I roll, but I think that I'm going to have to clear out a spot in my stuffed CAPS portfolio for an Amazon short.

Deej

No position in AMZN

9 Comments – Post Your Own

#1) On April 23, 2008 at 7:04 PM, nuf2bdangrus (< 20) wrote:

Shorted last week before earnings and ate crow in the rally.  Shorted today in the squeeze.  Me thinks this recession is going to be deep and nasty.   Nobody is borrowing.  Nobody is lending.

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#2) On April 23, 2008 at 7:37 PM, a1japb (< 20) wrote:

 If I understand right there is no sales tax at all on an internet purchase in the US??? I'm Canadian we pay tax on tax including internet we call it goods and services tax. If this is the case it will change for sure. This seams like an unfair advantage don't you think?

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#3) On April 23, 2008 at 7:53 PM, leohaas (92.24) wrote:

Amazon seems to be overpriced to me regardless of the sales tax issue. If I owned shares (I wish...), now would be a good time to sell.

For all you Canadians, there currently is no Federal sales tax in the US. Only states levy sales tax (OK, some local governments do as well). Typically, it is only applicable if the retailer has a physical location in the state. So if Amazon would have a store in NY, it would have to charge all its NY customers (including those ordering through the internet, over the phone, or through the mail) sales tax.

Some states (including NJ, where I live) have a "use tax". When filling out your state return, you have to report all your out-of-state purchases, and pay this tax. I have only met one person in my life who is honest enough to report this tax... 

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#4) On April 23, 2008 at 9:53 PM, AnomaLee (29.18) wrote:

Even during the last recession and 9/11 internet sales continued to rapidly grow. I don't expect that to change much this time. More consumers (including myself) are buying more stuff like electronics and clothing online for the convenience and now the  price savings is adding with rising fuel costs. [Even after S&H]

I don't like the stock(over-priced), but I do like the company. I enjoy the small perks I get for buying so many books through them. I'd assume that taxation would probably affect other retailers more than Amazon. Especially, online clothes retailers who have more equal competitors. I did read about these talks before but I figure they're bound to happen. It doesn't surprise me...

I'm not brave enough to short Amazon even with these tax risks. I just wouldn't buy because the valuations are ridiculous. (I'd thought about 2009 puts @ $71)

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#5) On April 23, 2008 at 11:46 PM, SpaceMonkey01 (36.29) wrote:

I like Amazon, not enough to buy their stock...but I do use them alot. Seriously, where can I get a DVD of The Big Lebowski, a bottle of hot sauce, a Pioneer Plasma and viking helmet all in one stop? I would not short purely for moral reasons as I value  the service  Amazon provides and they execute well. Probably not best investment strategy but there is plenty other garbage to short out there. For all the reasons, Deej and Anomalee point out, Amazon could be in for a hurtin' but the brick and mortar retailers will likely be hurt by people cutting down on impulse purchases and looking to pinch a few pennies by not buying a DVD at Best Buy or a book a Barnes and Noble. Look at prices of DVDs and books at Amazon vs. brick and mortar retailers...Amazon and other online retailer are always cheaper...I can wait a few days to get my item.

I also look to Amazon to cut into iTunes and others MP3 sales as they provide a good prices and don't use that DRM protection BS that makes it difficult to transfer between Mp3 players and other computers. 

What also baffles me even more is that Best Buy is not hurting more and Circuit City is not out of business. I mean who uses a brick and mortar retailer for big ticket electronics (i.e. high margin for retailers) anymore? I can go to cnet.com and read reviews of products and then see a side by side price  comparison of retailers selling the item and order online. You can always find a better price than a brick and mortar retailer and you don't have to pay sales tax. I found a price on my plasma that was 15% cheaper than at BBY or CC and was delivered to my home for a very nominal cost. Even if I were charged sales tax, it still would have been cheaper, even if I could find it in stock at a retailer. 

 OK. I am rambling. I will stop now. 

 

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#6) On April 24, 2008 at 6:12 AM, TMFDeej (99.47) wrote:

Thanks for the comments everyone.  Good point about Amazon being a WalMart, Costco, type cheaper is better when the comsumer is pinched sort of play.  The valuation is nuts at this level, the sales tax issue isn't going to help them, and I believe that consuemers are going to cut back on a lot of the fluff stuff that Amazon sells.  I have decided to short AMZN in CAPS this morning, but definitely not in real life.  This is why shorting for real scares me, I could keep thinking that I am right about Amazon and end up losing 200% on the trade before my predictions actually come true.

Deej

No position in AMZN 

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#7) On April 24, 2008 at 2:01 PM, Abnegazar1 (< 20) wrote:

It's not going to be easy just to "pass a law" and make this go away.  The problem (from the State's standpoint) goes back to 1992 and a case that was heard (and decided) by the Supreme Court - Quill vs. North Dakota.

In this case, North Dakota sued Quill, an office supplies retailer, for not collecting sales tax on items shipped via common carrier to North Dakota from their catalogue.

 The Supreme Court ruled that Quill was not required to collect sales tax from their customers as they were not protected by the laws of North Dakota (as they had no physical or business presence in the state), and based it upon the Commerce Clause of the US Constitution with Interstate Commerce.

 In order to "flat-out" allow a vendor to be charged state sales tax from a state where they do not do business, in my mind, would require a Constitutional amendment.

 Now, what COULD be done (and I believe the Streamlined Sales Tax Initiative group is trying to accomplish, although not all of the 45 states that charge a sales/use tax are currently on board) is to require a tax to be charged based upon an agree upon set of rules based upon where your customers are. 

 Of course, since every state has different rules on the taxability of items, this can be a very big task.  Hawaii taxes everything (even services), California exempts all services and anything where no tangible property is received (download software off the Internet in California - you don't pay tax; do it in Texas, and it's a taxable transaction).  Shipping costs, clothing (in New jersey), and other items are all variable.

 One day, I believe, that something will be worked out.  A vendor might have to collect a percentage from each customer in a state subject to sales tax, and remit that to a central FEDERAL agency that then divies it up amongst the state.  I could see that possibly getting by the commerce clause...but it will take some thinking and co-operation...and I don't know if that is going to happen sooner rather than later.

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#8) On April 24, 2008 at 3:24 PM, TMFDeej (99.47) wrote:

Wow great insight, Abnegzar1.  Thanks for sharing.  I can tell that you are very familiar with this issue.  Unfortunately, charging sales tax on things that are sold over the Internet just makes way too much sense from the states' perspective for me to believe that they won't persue it doggedly at a time where tax recenues are declining and many are running massive deficits.  As inept as many state and the federal government are if it means that they can get more money, they will probably ultimately figure something out.

Deej

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#9) On April 24, 2008 at 7:41 PM, Abnegazar1 (< 20) wrote:

Deej,

The states definitely want to pursue this revenue stream.  As someone previously mentioned, there is something called "use" tax.  Businesses frequently get audited for it, and it covers the situation of buying an item and having it shipped out of state to them.  Basically, if you don't pay sales tax for an item, then you are required to pay use tax to the state that you received posession of the property in (that's the basics, there are some exceptions to the rule - like in most of tax).

Since businesses tend to buy higher ticket items in higher volumes, they are fairly easy to audit for both sales and use taxes (again, use taxes covering out of state purchases).  The average consumer, however, is much harder to audit for use tax.

Governmental time and effort to audit an individual can be extensive, and isn't worth it (except in the case of automobiles - where they get you on registration.  If you were to buy a car in Orgeon (no sales tax) and drive it to your home, and use it there (unless you lived in another no sales tax state), then you would be required to pay Use Tax on it to the DMV).  There is a "90-day rule" for usage in another state, but you'd have to prove it...

This "Interstate Commission" has been around since 2000/2001 and hasn't been able to come up with anything concrete yet.  There are lots of differences amongst the laws in different states.  Besides being "unconstitutional" at the moment, forcing small businesses "currently" to collect tax would be a HUGE burden as the work would be volumnunous (sp.?) and most small business owners who ship all over don't have a working tax knowledge.  Some states have one return to file, others have a state return AND a city return for every city you are in (Colorado and Arizona, for example) - it would be a big mess, to Ma and Pa who have a small business. 

 We'll see what happens, but they are taking their time - as there is so much variation in current state law.

 

 

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