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Can Amazon Compete Now That It Charges Sales Tax?

Don’t be stupid. Of course it can.


There are many reasons to be skeptical about Amazon (NASDAQ:AMZN) these days. A nosebleed P/E measure of 310 on current earnings and 110 on forward earnings, for instance.

Or the fact that the new Amazon Kindle Fire HD recently got a poor reception from All Things Digital guru Walt Mossberg, saying the device isn’t as “polished, fluid or versatile as the iPad” from Apple (NASDAQ:AAPL).

Then there’s the fact that Amazon’s margins are razor-thin on everything, and a little inflation or consumer spending disruption will be painful indeed.

But one of the silliest arguments I’ve seen lately is the idea that Amazon being forced to collect sales tax — recently enacted in California, Texas, Pennsylvania and elsewhere — could hurt AMZN by stripping it of a competitive advantage.


Yes, saving an extra 6% or 7% on a big purchase like a flat-screen TV from Amazon makes a difference. I won’t act like in these times that it’s a non-issue. However those who think that the power of Amazon is simply to provide shopping at a cheaper price … well, you’re missing the point.

There’s no doubt that e-commerce is important to AMZN. But in its Q2 report (get the 10-Q here), services accounted for 16% of revenue — up from 13% the year before. And perhaps an even better proxy is that “media” sales are a third of total revenue — $4.1 billion of $12.8 billion in total sales. That means ebooks still are cooking, and its cloud storage business and streaming through Amazon Prime are heating up, diversifying sales sources and proving that this company does more than just sell books and electronics and shoes at competitive pricing.

It’s also worth noting that international sales accounted for more than 40% of total revenue — $5.5 billion of that $12.8 billion in total sales for Q2. So almost half of its business deals with international tax codes, not domestic tax codes, anyway.

In short, Amazon has a lot going on that is wholly separate from any sales tax impact on domestic e-commerce involving physical goods.

And by the way, it’s not like Amazon is now in the hole. It has just lost a competitive advantage, putting it on equal footing. You’ll pay sales tax on a purchase at the websites of any major retailer — whether you buy clothes at Target (NYSE:TGT), shelves at Wal-Mart (NYSE:WMT), office supplies at Staples (NASDAQ:SPLS) … you get the gist.

It’s true that consumers don’t need a reason to cut back on spending right now, but the idea that imposing a sales tax is the kiss of death for Amazon is just plain naïve.

That’s not to say I like Amazon. This stock is way too rich for me with that valuation on earnings, and I remain doubtful the Kindle Fire HD will be able to hang tough with the iPad.

But if you’re worried about sales tax … you’re missing the point.

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple.

Article printed from InvestorPlace Media,

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