Amazon (NASDAQ:AMZN) is grabbing the headlines this week with the news that it bested rival Netflix (NASDAQ:NFLX) in securing exclusive rights to stream HBO’s library of older shows — such as The Sopranos and Deadwood — via its Amazon Prime streaming service.
But its streaming business, while a big headline winner, isn’t the most pressing issue at hand.
It’s boring, stodgy old taxes.
Amazon & HBO: That’s a Victory
Snagging HBO’s content was a major win for AMZN and ensures that it will remain competitive with Netflix in the battle for streaming superiority.
The benefits to holders of Amazon stock are a little less clear; the details of the deal were not disclosed, and we have no idea what Amazon paid for the content.
Both NFLX and AMZN have some degree of flexibility in raising prices to consumers; last month, Amazon raised the price of an annual Prime subscription — which also includes free shipping on purchased goods — by $20 to $99, and this month Netflix announced it would be raising its monthly subscription cost by $1 to $2 for new subscribers. But bidding wars for streaming rights to popular content could easily erode profitability as the streaming market starts to get saturated.
Amazon’s streaming coup is getting most of the attention as the company releases its earnings (AMZN’s report is due out after the bell Thursday).
But the much bigger news is the effect that sales taxes are having on the “Walmart of the Internet.”
Amazon’s Big Weapon Is Being Disabled
Remember, one of the biggest advantages that AMZN has enjoyed over traditional brick-and-mortar retailers like Walmart (NYSE:WMT) and Target (NYSE:TGT) is that it didn’t have to collect sales taxes in the states in which it didn’t have a physical presence.
In high-sales-tax states like Texas, New York and California, that is an enormous competitive advantage. In Dallas, where I live, the combined state and local sales tax rate is 8.25%. When you do the math, it means that, all else equal, everything I bought on Amazon tax-free would be 7.62% cheaper than what I would pay at a local retailer.
Given the razor-thin margins of mass-market retail, that’s huge.
As consumers, we all enjoyed this tax loophole. But the state and local governments grew tired of watching their tax bases erode, and brick-and-mortar retailers got tired of seeing their customers poached by Amazon. AMZN is now required by law to collect taxes in 20 states — including the three largest by population, California, New York and Texas. More — including the fourth-largest state, Florida — are set to follow.
Within a few years, I would expect that substantially every state in the union — or at least all of those with populations large enough to matter to a nationwide retailer — will be collecting sales taxes from Amazon and other online retailers.
The effect on Amazon and holders of Amazon stock is crystal clear: It’s bad.