How good is Amazon.com?

Buying online from Amazon.com is a fantastic experience. Between the broad assortment, product reviews, available shipping options, ease of checkout and simple returns process there is a lot to like. It’s why the company’s sales are on fire, profits are beating analysts’ estimates, and the stock has traded above $200 the past month.



The best part about buying from Amazon.com is customers can avoid paying sales tax. This obviously gives the online retailer a tremendous competitive advantage, however, as you might expect, Amazon.com, like most retailers, is inclined to attribute its success to hard work and disciplined execution of a brilliant strategy.

But seriously folks, the no sales tax thing is huge. Even with all of the things Amazon.com does right, the company would suddenly appear fallible if it were to begin collecting sales tax from customers. How big an impact would such a change have? Well, imagine for a minute the taxation shoe is on the other foot and such companies as Walmart, Target, Best Buy and Lowe’s suddenly stop collecting sales tax at their physical stores and Amazon.com begins collecting sales tax.

The physical retailers would see a dramatic surge in traffic and an increase in basket size, just as they do when tax-free holidays are offered during back-to-school season. It stands to reason then that if Amazon.com were to begin collecting taxes it would experience something of a backlash as consumers would see their net cost rise somewhere in the range of 6% to 9%. How big a backlash is unclear, but it is likely to have a material impact on sales results even if no one at the company wants to publicly admit it.

Just look at the situation with Target and the company’s ongoing promotion of a loyalty program that save shoppers 5%. The program and the incremental sales it generates is expected to add at least a full percentage point to same-store sales during the second half of the year, according to the company.

Americans love saving money and hate paying taxes and Amazon.com thrives in part because it presents people with a situation where they can do both. But the free ride is ending. States need the tax revenue and conventional retailers are howling about the need for a level playing field as they report weak sales while sales at Amazon.com surged 52% during the second quarter.

The sales tax question came up during Amazon.com’s second-quarter conference call, and CFO Thomas Szkutak reminded listeners that the company operates globally and already collects sales taxes or the equivalent on about half of its revenue, and growth rates haven’t exactly suffered. Szkutak went on to reiterate the company’s 10-year-old stance in favor of something called a “federal solution.”

It is impossible to know what Amazon.com’s numbers would like if it had been collecting sales tax for the past 20 years and consumers would have been presented with a higher net cost as a result, but it looks like we will eventually find out given the forces now working against online retailers and the consumers who exploit the sales tax loophole.

When that day arrives, Amazon.com and other online retailers are going to be in for a rude awakening as most, if not all, of the advantages they enjoyed in the earlier days of online retail are gone. In fact, online-only retailers are now at a competitive disadvantage because they lack a physical presence that would afford them the type of multichannel capability enjoyed by those who collect sales tax.