The Amazon.com California Sales Tax Boomerang

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The Boomerang is an ancient weapon, thought to have been invented in Australia. It’s speculated that its original intent was to be a straight flying weapon, which due to aerodynamic imperfections sometimes took a curved path. With more work, this weapon then evolved towards the returning boomerang, which possesses the characteristics we’re familiar with today: when thrown, it tends to return to the thrower if it doesn’t hit anything first. If the thrower is not too skillful, however, he might find himself in as much danger as his original target.

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Such might be the fate Amazon.com (NASDAQ:AMZN) finds itself in. After using sales tax collection as a competitive weapon for years, Amazon.com has been forced to collect sales tax in several States, including California since mid-September 2012.

Why was such an event akin to a boomerang returning and hitting its thrower? Before Amazon.com had to collect sales taxes, this meant a competitive advantage over brick & mortar stores and their websites, and this competitive advantage could be as large as 9% of an item‘s selling price. In a fiercely competitive retail landscape, 9% if more than anyone’s operating margin and that’s all one needs to know regarding the importance. Fast forward to Q4 2012, and Amazon.com has now joined the ranks of those forced to collect sales taxes in California. A mix of Amazon.com having infrastructure in California, from affiliates to research divisions, and California being thirsty for revenues was all it took for California to force Amazon.com’s hand.

However, not all of Amazon.com’s competitors are being forced to collect sales taxes. That is where the boomerang returns and hits Amazon.com upside the head. Indeed, most of Ebay’s (NASDAQ:EBAY) sales as well as competitors like Tigerdirect.com – a Systemax (NYSE:SYX) subsidiary – or Overstock.com (NASDAQ:OSTK) are still not collecting sales tax in California. So, where previously Amazon.com was stealing sales from its brick & mortar competitors with the “duty free”* preposition, right now it’s Amazon.com which finds itself in the crosshairs of the same tactics. It’s thus not a surprise that Amazon.com reported revenues wildly below expectations at the same time that Overstock and Ebay surprised on the upside.

As more States continue to enforce sales tax specifically on Amazon.com, Amazon might yet see the boomerang returning in more places and its revenue growth flagging even more. No surprise, then, that the always steadfast Amazon.com which always refused to collect sales taxes, is now lobbying for a Federally-imposed online sales tax measure.

Conclusion

Amazon.com is tasting some of its own sales tax medicine and is not liking it, with revenue growth quickly converging towards numbers more akin with those exhibited by slower growing retailers such as Costco (NASDAQ:COST). Needless to say, Costco trades at a small fraction of Amazon.com in terms of earnings multiples.

Anyway, this kind of threat hardly seems the type of thing you expect to see in a stock trading at a $125 billion market capitalization on no earnings at all. It would seem that the stock could easily drop significantly from here.

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