The Digital Skeptic: Amazon Dries Up Under California Tax Heat

NEW YORK ( MainStreet) -- The Colorado technically lost its status as a river back in the mid-1960s when states such as California stopped it from reaching the ocean. Today Amazon ( AMZN) might go through a similar demotion for, well ... the exact same reason.

California politicians recently decided the giant Web retailer must do exactly what every other store in the state does: collect sales taxes.

Starting this week, the land of Arnold Schwarzenegger will take what in some cases is up to a 9.75% markup on the online retail action within its borders.

Amazon tried to sound upbeat about what will almost certainly be higher costs passed onto consumers. Scott Stanzel, an Amazon spokesman, was widely quoted saying the company will continue to offer lower prices and "the operation is not worried about losing business."

Analysts close to the stock also tried to sound positive. I've seen Colin Sebastian, senior research analyst with Milwaukee-based wealth management firm Robert W. Baird & Co. making the rounds saying that Amazon has operational room to lower costs and can keep what it charges customers near the current, usually lower-than-competitors' levels.

Sebastian specifically talked up something called Amazon Lockers -- essentially, a gizmo'd drop-off container that lets FedEx ( FDX) or UPS ( UPS) deliver items en masse, thereby shaving shipping fees and keeping the total cost to customers closer to Amazon's current no-sales-tax levels.

"On the financial side, they have the potential to save on shipping costs," Sebastian told CNBC. "The savings could be as much as 10% to 15%."

That might sound like Amazon can remain the undisputed low-cost Web retail champion it has always been. But even a casual ride down this retail river shows it will probably be parched by the state taxation sun.

Not just in California
Amazon's -- and the Web's -- increasing tax woes are most definitely not limited to California. According to Cromwell, Conn.-based credit card fee research firm Cardfellow, there are nine other states with similar so-called Amazon taxes. Biggies include Colorado, Pennsylvania and New York.

And these 10 Web tax-collecting states are just the leading edge of states wanting their cut of the online action. Approximately three dozen are in the middle of moving to so-called "streamlined online sales tax" collections that almost certainly will mean Amazon will need to collect more fees rather than less.

And the idea that Amazon has the operational flexibility to absorb these increased costs -- and keep total costs of what they sell where they are -- is very tough to accept rationally.  

Less efficient than Wal-Mart
The blunt reality of Web retailing is this: Selling stuff online is not less expensive than at bricks-and-mortar stores ... it's more expensive.

Don't believe me? Just compare Wal-Mart's ( WMT) cost to do business with Amazon's. Last year, the supposedly ultimately Web-efficient Amazon had something like 1.30 cents left over from every dollar it made after backing out all its costs. Wal-Mart had about double that for the same period -- 3.5 cents left over. And believe it or not, Amazon's efficiency is tending to decline. In the previous three months ending June 30, it had just roughly one half of one penny left over after all its costs were backed out.  

Either way, with these kind of razor-thin margins, where exactly will the nine-odd points California has rammed into Amazon's bottom line come from? Smart shipping lockers? I doubt it. Which essentially means these taxes will get passed onto customers -- which I strongly doubt consumers will stand for.

Among the many tales of shoppers stepping away from online services as costs rose, The Texas Tribune ran a solid series on online retail loyalty as prices increase.

"I do not think people who buy online buy online for the express purpose of avoiding the sales tax," said David Kruger, owner of Kruger's Jewelers in Austin, Texas, in a video about his store and the effect of taxes on his business. "But if you are talking about a big-ticket item, the savings in the sales tax is significant."

What exactly Amazon becomes, who knows. Certainly, it's not heading into Chapter 11. But the Amazon investors know and love -- the once and future magical low-cost online retail delta that fetches equally magical valuations -- is almost certainly drying up under the blazing taxation sun.

And that means, like the Colorado before it, Amazon will probably struggle finding its way to that languid ocean called profit.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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