Thursday, February 9, 2012

Will Amazon in USA Crash? How about Amazon in Japan?


Recently I have been hearing lots of news from industry insiders that say that Amazon in Japan is on shaky ground and that their share prices in Japan are way over valued when compared to their profit / loss spreadsheet.

Well, I'm not exactly sure about that (not nearly as sure about Amazon as how sure I am that Yahoo Japan is royally messed up) but I do know that Amazon in the USA is not all smooth sailing. One big reason Amazon in the states is in bad shape is because they operate on such a very thin profit margin. This thin margin does not allow for too many mistakes. That's all well and good but there's another huge problem for them and that is sales tax.

In the United States, sales tax is decided by states. Until recently, Amazon has skated around the sales tax problem but, as government budgets get tighter and tighter many states are clamping down on Amazon.

Until recently, if hit with the threat of a tax bill, Amazon would just pull up its roots and close all the businesses operating from that particular state, but now, more and more states are putting the foot to the pedal and demanding payment. How much longer can Amazon keep running away?

Mish Shedlock recently ran a story about this very subject:

Cash strapped states are furious with Amazon.Com over sales tax collections. Several states passed laws or have sent Amazon bills. Amazon's response in every case so far is to leave the state.
Online retail giant will close its suburban Dallas distribution center amid a dispute with the state over millions in uncollected state sales taxes, The Associated Press reported Thursday.

The AP obtained an e-mail Thursday sent to Amazon employees by Dave Clark, the company's vice president of operations.
Clark wrote that the center in Irving will close April 12 because of the state's "unfavorable regulatory climate."
Last year the Texas comptroller's office sent Amazon a demand for $269 million in uncollected sales taxes, plus penalties and interest, from 2005 through 2009.

The problem with these Sales Taxes though, is not as simple as it seems on the surface. A lot of this problem is not because of locations of Amazon offices or distribution centers; a lot has to do with locations of Amazon affliliates.  For example, even if Amazon doesn't have a distribution center or offices in, say, California, if an affiliate recommends a book on a blog like this with an Amazon link to buy that book, and that affiliate is located in California, then you can see where the problem begins. The state of California considers that a sale transacted in California.

That's where the trouble starts.

Amazon has had the same problems with North Carolina, Hawaii and Rhode Island. With state governments finding it harder and harder to fill their coiffures and pay their bills, it's only a matter or time before more and more states demand that Amazon start paying the bills. 

Paying those bills will probably kill Amazon as many of them will be past due for delinquent sales tax revenues and the amounts are in the hundreds of millions of dollars. 

The Market Ticker reports in "The Upcoming Crash of Apple and Amazon":

Amazon will also blow up; it shares Netflix's former screwball P/E (currently 101.)
And when both go, and they will, the Nasdaq will collapse since these two stocks are an outrageously disproportionate piece of the index.
Why do I put this forward?
Let's deal with Amazon first, since it's the simpler case.  Amazon's primary "lever" is the ability to play around the edge of the sales tax system.  This gives it an instant 6% (on average) price advantage over everyone else, more than enough to offset the shipping costs (which you pay in any event; whether shipped directly to you or to a retail store, you still pay for it in the product price somehow.)
But that sales tax loophole is going to close.  Over the next few years states will find a way, as the revenue shaft is getting out of hand for them. 
Now here's the problem: Amazon has a 2.58% (ttm) profit margin and a 3.14% operating margin.  This is less than the benefit they get from evading the state sales tax system.
In short, this is a firm that only exists because of its ability to evade that tax structure.  When, not if, that ends the company is a literal zero.

That sounds really bad for Amazon in the USA. Now, the question for those of us in Japan who love; will Amazon Japan survive? Well, Amazon Japan has a different set of problems than Amazon in the USA does. In the USA, sales tax is decided by different states. In Japan, sales tax is uniform nationwide and charged by the central government.

Amazon Japan has problems with the many competitors in Japan. At this time, some items on Amazon are cheaper than competitors and others are not. In my opinion, Amazon's best advantage is free shipping.

But with sales declining across the board and talk of a doubling in sales tax in Japan in the very near future, Amazon Japan's future looks to be an interesting ride.

UPDATE! A Japanese user sends in a very interesting piece on Amazon Japan avoiding paying sales tax:

「僕がAmazonを使わなくなった理由」"Why I just can't use Amazon anymore"

The article is in Japanese but you can get a simple Google translation here:


Boo said...

1. In the case of California, I believe the cost (to administer the new law) was going to be so high that after factoring in everything, it was going to be revenue-neutral. So revenue is not the reason for these bills.
2. In the US, prices are shown without sales tax added, both in physical stores and online. Psychologically, people tend not to add things up for the full price before heading for the cash register. So an enforceable sales tax law being passed wouldn't result in price changes except at check-out, well after the purchase decision has been made.
3. For those ordering English books in Japan, a quick comparison of prices with places like Kinokuniya makes it clear that an extra 10% won't change anything.

mikeintokyorogers said...

Thanks Boo!
1) According to Bloomberg, California wants the money so it would seem they are motivated by revenue (like the government scum they are):
2) Is not the issue. Whether customer pays the Sales Tax or not, the states want Amazon to pay it. That's the point. This is why Amazon has pulled up stakes and already left several states... Like I pointed out, this is an affiliate problem.
3) You're right. Japan has a sales tax rate that is the same in Kyushu as it is in Hokkaido... USA is different by state. That's huge. But! a doubling of sales tax will change a lot. Sales are down now as it is, history proves that an increase in tax is mirrored by the same percentage in sales decline. There's lots of proof of this but here's a quick one I found for you: "As is true for other commodities, the sales of alcoholic beverages tend to fall when prices increase. ".
Thanks Boo!

mikeintokyorogers said...

Boo san! A Japanese reader send me this to my Facebook account: 「僕がAmazonを使わなくなった理由」"Why I just can't use Amazon anymore"