Why Amazon Loves Equal Sales Taxes
Nov 10th 2011 8:55PM
Updated Nov 10th 2011 8:58PM
So the Senate is looking at this Main Street Fairness Act to collect sales taxes from online retailers. The knee-jerk reaction, of course, is that e-tailing giant Amazon.com (NAS: AMZN) would have to start collecting sales taxes on everything it sells. Some might term the bill an Amazon killer.
Amazon itself "strongly supports" passing this bill into federal law, and it said so in a press release yesterday.
Shock! Horror! Let the shareholder lawsuits commence, as Amazon clearly has gone insane!
My memory is great, just very short
But this isn't actually news -- it's simply another reminder that Amazon actually wants a standardized sales-tax system across state borders. The company supported an earlier version of this bill, shoulder-to-shoulder with traditional bricks-and-mortar retailer Sears. Back in May, CEO Jeff Bezos told Consumer Reports that the current state-by-state rules are just too darn complicated:
"Our point of view on this is that we should simplify the sales-tax system, and we've been insisting on this for 10 years. We support the streamlined sales-tax initiative, and 22 states have signed on. The right way to fix this is with federal legislation. Sales tax is very complicated."
Yes, it is. At the moment, there are more than 7,500 taxing jurisdictions in this country -- states, counties, cities, transit authorities, and the list goes on -- each with its own set of rules and regulations.
Is Bezos a hypocrite?
This from a company that killed Amazon affiliate programs in states including Illinois and California when those states passed local laws that would require affiliate parent Amazon to pay taxes in their states. Tax-collection issues have been named as the reason Amazon hasn't bought digital-video expert Netflix (NAS: NFLX) yet -- because those pesky DVD shipping centers would create a collection requirement in every state.
You might think a company with that kind of history would be on the other side of the unified tax-collection fence, right alongside known bill critics eBay (NAS: EBAY) , Facebook, and Yahoo! (NAS: YHOO) .
Adding taxes to every Amazon invoice would just erase a key business advantage from Amazon's arsenal, right? No CEO in his right mind would endorse government crews driving in with dump trucks and backhoes to fill up that hard-won pricing moat.
Amazon's not-so-secret weapon
OK, so passing the Enzi-Durbin-Alexander bill might level the playing field with physical stores. There's still a pretty wide moat made from a lack of overhead costs, though. Sears needs to staff, stock, power, and maintain its physical stores; Amazon staffs a relatively small number of shipping centers, packed to the gills with high-tech efficiency tools that reduce operating costs.
And maybe that's exactly why Amazon likes the taxation idea, as long as it's applied to every one of its major rivals. The support statement gleefully notes: "It's a win-win resolution -- and as analysts have noted, Amazon offers customers the best prices with or without sales tax."
From Bezos' point of view, we'd see inefficient e-tailers falling by the wayside while the real winners -- such as Amazon -- continue to thrive. Amazon will of course keep its tax bill as small as possible by managing its geographical business footprint, but there's no reason to fight a blanket taxation that applies equally to everyone, everywhere. It's a culling of the online-retailer herd. You could interpret the opposition from eBay and Overstock.com (NAS: OSTK) as a sign of weakness. Are these guys scared of coming out on the losing end in this proposed rebalancing of the online marketplace?
The bill is not a slam-dunk deal, even with its bipartisan and cross-sector support. Some critics argue that the cutoff level for applying the new rules is too low at $500,000 in online revenues. You'd end up taxing a lot of small businesses that are barely scraping by to begin with. Only the tiniest single-family sellers would evade new tax obligations, and half a million in sales with a gross margin of perhaps 10% wouldn't exactly create wealth. As eBay puts it, "It does not make sense to expand Internet sales tax burdens on small businesses at a time when we want entrepreneurs to create jobs and economic activity."
Fair enough; the current proposal isn't perfect. But if this bill doesn't pass in its original or some modified form, another attempt will come behind it. The age of tax-free online retail is coming to an end in our lifetime, people.
Amazon will keep killing Sears and Wal-Mart with or without revised taxing rules. Learn more about the e-tailer's business advantage in this free report, unabashedly titled "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." Grab your copy -- this eye-opening special report is totally free.
At the time this article was published Fool contributor Anders Bylund owns shares of Netflix but holds no other position in any of the companies mentioned. The Motley Fool owns shares of Yahoo! and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Yahoo!, Netflix, Wal-Mart, Amazon.com, and eBay, and have also recommended creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.
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