Here’s How Amazon Stock Pays Practically Nothing in Taxes

E-commerce giant AMZN pays every penny it owes, but there is a  downside to the situation

It’s not difficult to use Amazon.com (NASDAQ:AMZN) as a proverbial punching bag. Not only does the internet behemoth pay practically nothing in corporate income taxes, but with Amazon stock at its current price, CEO Jeff Bezos is the world’s wealthiest man. Such a high profile keeps everything he and his company does under constant scrutiny.

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The world has not been shy about doing so either, consistently pointing out how little the big company hands over to the IRS in any given year. Presidential candidate Joe Biden was the most recent to chime in, echoing similar sentiments served up by fellow Democrats Bernie Sanders and Alexandria Ocasio-Cortez.

It’s been straw man for years though.

Whatever the history of the criticism, as is so often the case in the game of political rhetoric, inconvenient details are omitted as needed. The reality is Amazon pays every penny of taxes it owes.

And, perhaps more prescient to current and prospective owners of Amazon stock, there’s going to come a point in time when the company is forced to pay a tax bill that looks a little more like those paid by comparable corporations.

Every Penny Owed

Last year’s tax bill? Nada. Zip. In fact, Amazon received a refund of $129 million despite a pretax profit of $10.8 billion. That was only a little less than its 2017 refund, when it booked a pretax profit of $5.4 billion.

Investors need to be careful about lumping all tax liabilities into one aggregate sum though. While it’s true that Amazon hasn’t paid any Federal income tax since 2016 (and even before then paid very little), there is more to a corporate tax liability than just Federal taxes on profits. The frustration is ultimately rooted in deductions that have been reducing corporate tax liabilities since well before President Donald Trump’s business-friendly tax code overhaul went into effect in 2017. Namely, the company’s investments in research and development (R&D), its investment in property and equipment, and the cost of shares granted to employees as part of compensation packages all whittle down Amazon’s tax liability in any given year. In most cases, that spending pares back tax bills on a dollar-for-dollar basis.

For 2018, R&D spending shaved $419 million from its tax liability. Stock-based compensation took it down another $1.1 billion.

Then there’s the historical losses being carried forward to offset future profits.

Although with a different schedule, as is the case for personal income taxes, losses that would exceed maximums permitted in any given year can be saved and then applied in later years, until fully extinguished.

Amazon.com operated in the red for years since its inception in 1994, only turning a reliably recurring profit after 2014. There are still past losses on the books that will be used to offset future earnings’ incurred taxes. With profits now the new norm, Amazon is using up the remainder of those past losses at a healthy clip.

Most important: Amazon has, to the best of its ability, remained 100% compliant with U.S. and state tax laws, paying every penny it owes even if not one cent more.

The Rest of the Story for AMZN

To that end, it’s unfair to acknowledge-but-excuse Amazon’s modest tax burden without pointing out a bigger-picture upside. That is, while Amazon may owe little to no taxes in any given year, it’s still responsible for facilitating an enormous degree of tax revenue that might never take shape if the company didn’t exist.

Case in point: Amazon turned over $1.18 billion worth of state, local, and international tax receipts to the appropriate entities in 2018.

Perhaps the most relevant but most overlooked nuance of Amazon’s tax-revenue driving capacity is the write-down of its stock-based compensation plan. While the program reduces income that would otherwise be taxed at a maximum of 21%, it’s passed along to high-earning employees who may pay a marginal rate of as much as 37% on the entire amount of Amazon stock granted them.

In a sense, by paying less in corporate income tax, it’s possible Amazon is generating even more tax revenue than it would by spurring greater personal income tax receipts.

Less directly, the tax-reducing spending on research and property — an option offered to all corporations — helps create jobs that spur more tax collection. That’s why such spending is incentivized.

Bottom Line for Amazon Stock

For the record, it’s not just Amazon that hasn’t paid Federal income tax. General Motors (NYSE:GM), Netflix (NASDAQ:NFLX), Southwest Airlines (NYSE:LUV) and a whole slew of other major corporations have sidestepped at least one year’s worth of tax liability of late; many have sidestepped a tax bill more than once.

Amazon has proven to be the poster child for the problem, however, by virtue of being the most pervasive brand name among the major offenders. The fact that it has been accused of underpaying and overworking many of its employees hasn’t helped keep the public’s eye off of the organization.

While Amazon stock owners are enjoying the limited amount of taxes the company has been paying, it is  not a situation that will last indefinitely. Sooner or later the carry-forward losses will be used up.

In the meantime, to continue the growth-investment-oriented tax breaks, Amazon.com has to continue capital spending rather than passing income along to shareholders. Eventually the company may run out of things worth buying for the purpose of driving growth. Most of those funds would, for most other outfits, be passed along directly to shareholders. That’s no small trade-off.

Stock-based compensation also proves dilutive to existing shareholders.

Amazon may not be paying Federal income taxes, but that advantage is still coming at a price, of sorts.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter at @jbrumley.


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/heres-how-amazon-stock-pays-practically-nothing-in-taxes/.

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