Amazon margins and online sales tax

By | January 30, 2013

Amazon reported Q4 earnings on Tuesday. Q4 revenues soared to $21 billion, up 22% Y-o-Y. Net income was a dramatically different story at $97 million. Looking at the net margin, it comes out to about 0.5%.  It reminds you of the imaginary quote “Don’t worry about the profits, we will make it up on volume.”

What’s up with the margin? Is it okay to only earn 1/2 of a penny on each dollar? Amazon CEO Jeff Bezos was on a recent Harvard Business Review podcast and was asked that exact question. His response was pretty sensible,

“Percentage margins are not one of the things we are seeking to optimize. It’s the absolute dollar-free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.”

Amazon - Sales Tax - BezosBezos is no fool. He is an ex-hedge fund manager, and Fortune Magazine’s 2012 Businessperson of the year. He holds a long-term strategy and has consistently made bold, strategic, and industry-altering moves.  He has also done well for investors. Apparently, Bezos has delivered about 12,000% shareholder return while CEO.

Analysts like the stock.  As of today’s close, AMZN was $272.  On Finviz, you can see that most analysts reiterated their ratings with a target price between $260-$335.

What about sales tax? My primary questions is about sales tax. If you compared Amazon’s net margin % with the average sales tax % (that is not getting collected by Amazon, or the Government) it’s not a pretty picture. If customers had sales tax added to purchases, would they buy so much stuff online? If AMZN had to hypothetically pay state taxes (after operating or net income), they would be unprofitable.

AMZN vs sales tax

States want their taxes.  Apparently 45 states have sales or use tax that should apply to online purchases. Either the retailer should collect the sales tax (which most don’t) or the buyer should voluntarily pay the tax on their tax form here. The majority of online retailers don’t collect sales taxes with the order because they do not have a physical presence (nexus) in the state of the buyer. Here is a good explanation of sales tax on the internet.

I was curious, so I dug up a state tax form. This one is from Virginia (pdf) and it looks like they really do want the tax money from the online purchases. Un-fun.

The use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax was not paid at the time of purchase.

Amazon know this. They have a section of their website that gives instructions to customers and tries to clarify the mystery surrounding taxes for online purchases.

Just as often, they lobby against the require to collect sales tax at the time of purchase.  Naturally, they would like to leave it to the consumer (who may, or may not do it). Amazon went back and forth with the California legislature, but lost. Amazon started collecting taxes on purchases made from California in September of 2012. Unsurprisingly, people started to stock up on things from Amazon before the tax-collection started.

The looming deadline prompted San Diego artist John Purlia to finally buy that Samsung flat-screen television that had been sitting in his Amazon shopping cart for months

Inevitably, more sales tax will be collected online. States and local municipalities are dirt poor.  Tax revenues is shrinking.  Some of their bonds are junk status. States want that revenue and they will argue (rightly) that this levels the playing field for local retailers.

I am no fan of taxes, but the law already exists. From the state’s point of view Amazon will do a better job of collecting sales taxes than relying on 1) millions of people in the US 2) filing their taxes 3) keep track of their purchases 4) and doing it appropriately.

It’s a headwind for Amazon and other retailers. If Amazon has to collect that tax from all of its millions of consumers, sales will go down. That said, I am avid shopper on Amazon and will continue to use their website, reviews and free 2 day shipping with Prime.  Even though I don’t believe the 0.5% net income is a sustainable business model, I will not be betting against Bezos or the stock.  I will not be writing naked calls.

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