Amazon’s sales for Q4 may be hurt by tax collection

Posted on Jan 17 2013 - 8:31pm by Harvey

imagesAmazon’s recent move to act as a government extension to collect taxes may have probably hurt sales performance of the largest e-commerce site in the world, said industry executives and analysts. They expect to know more how Amazon fared when the internet retailer submit its quarterly report this coming January 29.

Best Buy Co., one of the biggest competitors of Amazon noticed that consumer purchases in three states where Amazon imposed tax collection was higher in the days leading to the implementation of tax collection.

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

Competitors and critics of Amazon had long ago argued that the internet retailer had an unfair advantage of not collecting state sales tax for online purchases for several years because they have physical stores in their area of operations.

But following the 2008 financial crisis, many states started looking for additional tax revenue which now includes taxing  Internet retailers like Amazon. Brick-and-mortar  vendors now hopes that such measure will work in their advantage, reducing Amazon’s price advantage, and to help them regain lost sales.

Amazon.com started collecting state sales tax in California on September 15, a good two weeks before the start of the fourth quarter. The Internet-only retailer imposed a tax of7.25 percent to 9.75 percent. Third party sellers on the site also noticed a decrease in sales during the same quarter when compared to other states, said a research firm ChannelAdvisor.

Amazon also implemented tax collection in Texas in July and Pennsylvania in September.

Analysts are waiting for the fourth quarter report to see whether or not consumers changed their spending habits on the site after the implementation of sales tax in three states.

ChannelAdvisor, which analyzes data useful for merchants selling wares online, said it checked into its clients’ sales on Amazon in California and compared them to sales in other states before and after the  period when tax collection started.

ChannelAdvisor revealed that its client’s sales before tax collection in California were 5 to 10 percent higher compared to other states. A week before the tax period was to begin in September 15,  sales jumped to as high as 70 percent compared to other states.

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

After September 15, sales in California were on the same level as with the other states.  Weeks after that, sales dropped by as much as 10 percent, data from ChannelAdvisor showed.

The busiest shopping period of the year between late November and early December also saw a shard decrease in sales in California compared to other states. However, the sales figure showed recovery toward the end of the holiday period, ChannelAdvisor said.

“There was a sales impact of about 10 percent at the worst point of the dip,” said Wingo.

Items priced between $200 and $250 had been impacted big following the tax collection in California, said Wingo.

Wingo thinks that Amazon may have also lowered the prices of items hard hit by the tax collection, although he also said that it can be tricky to distinguish the move from the usual holiday sales promotion that were also happening.

Morningstar analyst Hottovy believes that the tax collection move may have affected Amazon’s profitability during the fourth quarter.

Thomson Reuters I/B/E/S forecast that Amazon will earn a revenue of $22 billion, or 52 cents a share during the fourth quarter. During late October, Amazon estimated that operating results could range from a profit of $310 million to a loss of $490 million.

Hottovy thinks Amazon would make $22 billion during the fourth quarter, with an operating loss of $210 million, or a total of $135 million after deducting stock-based compensation and other expenses during operation.

Best Buy said that its stores in California, Pennsylvania, and Texas saw sales increase of 4 percent to 6 percent compared to its other stores somewhere.

It also disclosed that an increase of 6 percent to 9 percent in sales in purchases online compared to to the rest of the chain.

Best Buy reported an overall good sales performance during the holiday season, adding a value to its shares up to more than 10 percent.

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

Amazon was offering a slightly lower price for consumer electronics compared to Best Buys despite the tax changes, Zybowski said. But apparently Best Buy benefited from even a small change.

“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 added.

As an added incentive, for say a purchase of a new TV set, Best Buy will take the old TV away and will offer its Geek Squad for home installation. Such free service is not being offered by Amazon, said Zybowski.

Amazon declined to comment on the issue whether tax collection impacted  sales in three states, although some Amazon executives did mention before that there little or no impact in other regions at all.

Some analysts still believe in Amazon’s power to attract customers because of its huge array of selection and convenient, fast shopping offers, and not just its low prices.

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

source: reuters

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About the Author

Harvey is keen with mobile technology and loves writing about all things mobile. He is passionate in helping technology challenged people by finding resolution to their issues. Contact him through [email protected] for assistance.