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

UPDATE BELOW!

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:

Amazon May Cut Ties to California Over Tax Issues; Texas Distribution Site Closed Over Similar Issues Last Month; Litigation Issues Move to Forefront

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 Amazon.com 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 Amazon.jp; 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"　http://site-ichijo.net/blog/archives/date/2010/1011-231855.php


The article is in Japanese but you can get a simple Google translation here: http://translate.google.com/?hl=en&tab=mT

The Amazon Box: Genius Promotion in the Garbage Pile

When is Amazon going to take over the world and destroy every single brick and mortar retailer in existence? I don't know, but wouldn't be surprised if, in say, 5 years, people do 85% of all their shopping on Amazon.

PETE SEEGER - LITTLE BOXES

Amazon is everywhere. And Amazon boxes are all the same... But! They are a world apart from all the other little boxes! Amazon has created a goldmine in the neighborhood trash. Read on!

There is one thing abut Amazon that really struck home to me about last Christmas. In my neighborhood, cardboard boxes are recycled and thrown out in bundles on Tuesday. Right after Christmas, I noticed tons of boxes in those recycled piles that had the Amazon "smiling lips" logo along with their easy to recognize lettering. "Wow!" I thought, "Everyone is doing their Christmas shopping on Amazon."

The Amazon boxes were everywhere you looked! They were much more ubiquitous than they were even the Christmas before.

Gee, I think someone bought Star Wars stuff through Amazon.

Don't you think every kid in the neighborhood saw this? (This

was taken near my house last week!)

Now, think about that; see a brand in the garbage and having a positive brand name recognition is a rare case indeed. But Amazon pulls it off. isn't this just genius advertising? Usually any promotion and advertising will stop at the end of the the sale. But not with Amazon! With Amazon, the promotion continues even after the items have been sold, shipped, while they are delivered, opened and disposed of!

Now that is just brilliant in its simplicity and when you stop to think about it for a half a second, its just plain smart business.

Usually if you see a makers box in the garbage, it doesn't have a good image.  When you see a Nike Tennis shoes box or McDonald's packaging in the trash, it's just trash. You don't get any positive feelings about that company. It doesn't have a good impact on your consciousness. But the Amazon mark? The Amazon mark is different. It remains as a very positive note to all who see it. It is a reaffirmation that shopping at Amazon is good, cool, secure and smart. Really! Think about it. 

When you see a McDonald's wrapper in the trash or on the street, do you think, "I want to eat McDonald's!" No. You don't. But when you see an Amazon.com box, you think, "There's another person who is ordering through Amazon." It confirms what you already thought; that your last purchase through Amazon was the best deal and you bought from the right place.

And all of this positive brand recognition all just in how a simple logo and branding is handled. Compare this to how poorly a company like Groupon haphazardly handles their logo; Groupon's is different almost every time you see it. Amazon, like any great companies logo, is the same every time.

I don't know if Amazon planned it that way, but it doesn't matter. The results are in: When anyone sees that Amazon mark on a Amazon logo in the trash, it is a 3rd party opinion that Amazon is a good place to do business with.

Name & logo are unmistakable!

A good 3rd party opinion from someone through a garbage pile to me, the customer, is positive reinforcement and excellent motivation to be a return customer. And that didn't cost the retailer anything extra! 

Can you think of one other example whereby a company uses their refuse to put their company in a positive light to the public? I can't. If that isn't genius marketing, I don't know what is!   

UPDATE! 

Yahoo just reports today that Amazon beats out Costco for prices! Read here.