Amazon holiday results to show sales tax impact

SAN FRANCISCO Thu Jan 17, 2013 7:06am EST

A zoomed illustration image of a man looking at a computer monitor showing the logo of Amazon is seen in Vienna November 26, 2012. REUTERS/Leonhard Foeger

A zoomed illustration image of a man looking at a computer monitor showing the logo of Amazon is seen in Vienna November 26, 2012.

Credit: Reuters/Leonhard Foeger

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SAN FRANCISCO (Reuters) - Acting as a tax collector may have hurt Amazon.com, Inc's holiday sales analysts and industry executives said, but they expect to know more when the internet retailer reports its fourth-quarter results on January 29.

Best Buy Co., an archrival of Amazon in consumer electronics, saw holiday online sales increase in three states where Amazon started collecting sales tax ahead of the period.

"There was a little softness in states where Amazon is now collecting sales tax," said R.J. Hottovy, an equity analyst at Morningstar. "That isn't surprising to me. It levels the playing field for brick-and-mortar retailers."

Critics of Amazon argued it had an unfair advantage because most retailers have had to collect state sales tax on online sales for years because they have stores and other physical operations in these locations.

But many states, hungry for extra tax revenue in the wake of the 2008 financial crisis, introduced new laws requiring that Internet-only retailers also collect sales tax. Brick-and-mortar retailers hope the requirement will reduce Amazon's price advantage and help them recoup lost sales.

CHANNELADVISOR DATA

Amazon, the world's biggest Internet retailer, began collecting sales tax of 7.25 percent to 9.75 percent in California on Sept 15, about two weeks before the start of the fourth-quarter. Third-party sellers on Amazon.com saw a drop in sales during the quarter, compared to other states, according to an analysis by e-commerce firm ChannelAdvisor.

It also started collecting sales tax in Pennsylvania in September and in Texas in July.

Amazon's fourth-quarter results should provide clues on whether consumers changed their shopping habits when faced with higher taxes on their purchases from the company's website.

ChannelAdvisor, which helps merchants sell more online, analyzed its clients' sales on Amazon.com in California, and compared them to other states before and after the sales tax kicked in.

Before Amazon began collecting the tax in California, ChannelAdvisor client sales were 5 percent to 10 percent above other states. The week before the September 15 start of the tax, sales spiked as high as 70 percent compared to other states.

"The surge before the tax went into effect was much larger than I thought it would be," said Scot Wingo, chief executive of ChannelAdvisor. "Californians definitely bought a lot in the three or four days before the tax went into effect."

After Amazon began collecting tax, its California sales leveled with other states. Then, in early November, they slipped as much as 10 percent below other states, ChannelAdvisor data showed.

During one of the busiest holiday periods, in late November and early December, sales dipped further in California vs other states. Toward the end of the holiday period, client sales in California recovered, the data showed.

"There was a sales impact of about 10 percent at the worst point of the dip," Wingo said. EBay, another Amazon rival, is an investor in ChannelAdvisor. Wingo also owned Amazon shares, but sold them in the fourth quarter for personal tax-related reasons.

Amazon's tax collection in California had the most impact on fourth-quarter sales of more expensive items priced at $200 to $250, Wingo said.

PRICES, PROFIT

Amazon probably lowered prices by 8 percent to 9 percent on items most affected by this, although it is tricky to separate such reductions from the usual holiday season promotions that were also happening, Wingo said.

The extra price competition may dent Amazon's profitability in the fourth quarter, Morningstar's Hottovy said.

Amazon is expected to make 52 cents a share in the fourth quarter, on revenue of $22.3 billion, according to Thomson Reuters I/B/E/S. In late October, the company forecast operating results ranging from a profit of $310 million to a loss of $490 million.

Hottovy expects $22.4 billion in revenue and an operating loss of $210 million, or a $135 million loss after excluding stock-based compensation and other operating expenses.

BEST BUY

In California, Texas and Pennsylvania, Best Buy said it saw a 4 percent to 6 percent increase in online sales during the holiday versus the rest of its chain.

The retailer also saw an increase of 6 percent to 9 percent in online orders that are picked up in its stores in those three states compared with the rest of its chain.

Overall, Best Buy reported better-than-expected holiday sales last week, sending its shares up more than 10 percent.

"This makes Amazon equal to everyone else. They no longer have that sales tax advantage," said Anne Zybowski, vice president of retail insights at Kantar Retail. "If this had happened to Amazon when they were just a bookseller years ago, they may not be as big as they are now.

Despite the tax changes, Amazon's consumer electronics prices were still at least 5 percent below Best Buy's during the holiday season, Zybowski said. But Best Buy may have benefited from even a small change in this area.

"Particularly in consumer electronics, any narrowing of Amazon's price advantage at the margin is important because Best Buy brings service and other shopper benefits to the category," she said.

Best Buy will take away people's old TVs when they buy a new one and the company's Geek Squad service will install devices in shoppers' homes, services Amazon does not provide, she noted.

An Amazon spokesman declined to comment when asked if the company saw an impact on fourth-quarter sales from the collection of sales taxes in the three states.

In the past, Amazon executives have said there was little or no impact from such changes in other regions.

Several analysts have argued that shoppers use Amazon for its vast product selection and convenient, fast shipping and returns, and not just its low prices.

"While not great for Amazon, it's just one of many consumer benefits its service offers," said Ken Sena, an analyst at Evercore Partners. "And while there may be early effects from this change, I still see usage trends remaining in Amazon's favor."

(Editing by Leslie Gevirtz)

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Comments (2)
crawdoogie wrote:
Way to go State of California and BestBuy! Increasing the profits for BestBuy by sticking it to the taxpayers. Amazon’s whole business model blows BestBuys corporate model of greed away. For instance, just try to return something to BestBuy,man what a pain. While with amazon you just print up a usually prepaid return label, slap it on the box and drop it at UPS. Done.
So what did Amazon do in response to this? They have just opened a 1,000,000 sq ft. distribution center in San Bernardino California and provided 1,000 new jobs in area with unemployment near 14% and without any tax concessions from the city, county, or state. AND median pay inside Amazon’s fulfillment centers is 30% higher than jobs in traditional retail stores. AND at a time when other businesses are cutting employee benefits Amazon provides a full range of benefits, including shares of company stock, paid time off, an employee discount, and life and disability insurance.
So Best Buy has leveled the playing field? Hardly. Best Buy will be history within five years now that Amazon has moved into Best Buys turf with still better prices and way better services Amazon’s plan is to implement same day deliveries and are adding another mega distribution center in Northern Cal. Bye-bye Best Buy.

Jan 17, 2013 6:26pm EST  --  Report as abuse
Sales taxes or not, so long as Amazon has the cheaper price, that’s where I’m shopping. Plus I don’t have to worry about getting to a store, dealing with crowds, shoving the boxes into my car at odd angles and “hoping” I can shut the trunk/doors, etc.

Click, confirm, two-day shipping to my door, no muss and no fess all for cheaper than dealing with brick-and-mortar even with sales tax.

“Main St” merchants just don’t get it. If you can’t be competitive, innovative, and market/advertise correctly to draw customers into your store, then maybe you shouldn’t be in business.

Sales taxes in the long term aren’t going to “level” the “playing field” so long as Amazon offers the merchandise people want at lower prices and offer deals on shipping making it uber-convienent for consumers to shop.

That’s called healthy marketplace competition.

Jan 17, 2013 8:05pm EST  --  Report as abuse
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