California has just reported Q4 2012 sales tax receipts. This is the first full quarter since California changed its laws to enable more sales tax collection from online retailers, instead of trusting individuals to pay these taxes voluntarily (which they didn't). These numbers offer a view into the size of online retail being subjected to sales tax in California, as well as the impact on Amazon.com (AMZN).
The amount collected by California during Q4 2012 was $96.4 million. Sales tax rates vary greatly by city and county, but California has a base tax rate of 7.5%, which can go up to as much as 10% due to local taxes. If we consider an average sales tax rate of 8%, then the taxes collected by California mean that the revenue they were applied to was about $1.2 billion. 8% is conservative, a higher sales tax number would produce a lower revenue estimate.
This is where it gets interesting. It's hard to estimate Amazon.com's share of online retail. Some sources put this at 33%. I will consider 3 scenarios where Amazon.com has 35%, 50% and 65% of California's online retail sales subjected to sales tax. What would this mean? It would mean Amazon.com's revenues from California were $421 million, $602 million or $783 million, or to put it simply, those revenues were in a range of $421 million to $783 million. Again this is conservative, all the share numbers considered are aggressively high, lower share numbers would produce a lower revenue estimate.
Now, as per Amazon.com's latest earnings report for Q4 2012, Amazon.com's U.S. segment sales were $12.2 billion. Of these, around 85.3% (if the company-wide proportion holds) should have been 1P (first party, Amazon.com sales) revenues, or $10.4 billion. That is, $10.4 billion of Amazon.com's revenues are comparable to those which had to collect sales tax in California, since this number excludes 3P (third party) and AWS (Amazon Web Services) revenues.
At this point, we thus know that Amazon.com's revenues from California were around 4.1% to 7.5% of Amazon.com's overall U.S. 1P revenues. This seems to indicate that sales tax collection has a very large impact on revenues, since California holds 11.9% of the U.S. population, and worse still, it produces 13.4% of the U.S. GDP.
It would seem, from the sales tax collected by California and the probable share of this attributable to Amazon.com as well as Amazon.com's overall U.S. sales, that California right now represents a lower sales intensity for Amazon.com than the state's population or wealth would otherwise imply.
Due to Amazon.com's secretive nature, we cannot know this for sure, but using rational estimates the discrepancy seems so large that no other conclusion can be drawn other than saying that the sales tax impact is very, very significant. As sales tax collection spreads to most other states, this phenomenon thus seems strong enough to completely stop Amazon.com's revenue growth in its tracks. This basically confirms the same conclusion I reached through another approach.
Amazon.com does not trade with valuation multiples that are compatible with this conclusion. If such comes to pass, Amazon.com will have to trade much lower. eBay (EBAY) is not vulnerable to this dynamic since most of its revenues will continue to be untaxed, both in the present environment and in an environment where Federal law is passed, which will allow for easier sales tax collection by the states, since this law will include exclusions for small 3P merchants. Presently, the exclusion that's being proposed stands at $1 million in revenues.
I might also add that if the estimates in this article are somehow off the mark, then Amazon.com could always present the real numbers and dispel any misgivings.
Disclosure: I am short AMZN.