Amazon threatened by sales tax issue, J.K. Rowling

Update: Author J.K. Rowling decides to self-publish Harry Potter books at Pottermore site

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Amazon facing sales tax across across many states
Amazon CEO Jeff Bezos wants new federal legislation to solve his company's looming sales tax problem that threatens sales, profits and ultimately the stock price if not resolved.

Think Amazon is a great investment deal because the stock has nearly doubled over the past 12 months?

Might want to think again, as even the company (NYSE: AMZN) is acknowledging these days the sales tax issue looming in many states across the nation for products shipped online could take a toll.

Then came the news Thursday from blockbuster fiction writer J.K. Rowling that she will sell ebooks of her popular Harry Potter works for the first time ever but she will do so on her own new site, Pottermore. This is a major development for Amazon, which to date is the largest and most significant provider of ebooks, controlling more than 50 percent of the market. Rowling is the biggest author so far to go around Amazon, selling ebooks directly completely bypassing Amazon and other ebook providers including Barnes and Noble.

Since Amazon became an online retail force over the past decade and a half, the company has been protected by a 1992 U.S. Supreme Court ruling (Quill Corporation v. North Dakota) prohibiting a state from forcing businesses to collect sales tax unless they have a brick and mortar presence in the state. That's why for so many years buyers of luxury jewelry and clothing have bought products in one state while traveling, having them shipped back home if that store did not have a location in their hometown.

Technically speaking, taxpayers in many states are supposed to pay the tax to their respective government for purchases but few rarely do. In the case of books, or other retail items sold by Amazon, the money is small on an individual basis. But Amazon has revenue of nearly $40 billion. Even though the company is global, the largest segment of its business comes in the United States. Spread across the 50 states, the potential sales tax involving states is significant.

And everybody knows few states have enough money as it is these days.

Dollars states lost before the online retail boom in the Internet age were minimal compared to what states claim they are losing now to online companies, Amazon in particular. Complicating matters even more for Amazon has been the fact that the company's legislative battle against the issue must be fought across 50 different states with different legislative personalities.

Only Tennessee, where Amazon is investing millions to build multiple distribution centers, is the legislature working actively on behalf of the company's interests. Amazon also collects sales tax in five states, including New York, Kansas, Ketucky, and Washington where it has physical locations. The leaves more than 40 states on the hostile or near hostile list and many, including California, have been aggressively targeting the affiliate partner e-commerce sites Amazon works with, pushing the company to threaten actually ending those relationships in hostile states.

Amazon CEO Jeff Bezos understands how difficult it will be for Amazon to get uniform action to its satisfaction across all 50 states so he's pushing for federal legislation to fix the problem. But that's easier said than done considering states for each elected member of Congress will likely pressure officials to keep their concerns a priority since most are facing difficult budget constraints.

Some estimates suggest and Amazon has acknowledged the problem, if not resolved favorable to Amazon across the country, could cost the e-retailer hundreds of millions in sales - costing the company a long-held advantage it has had against brick and mortar retailers by effectively being able to discount products by the sales tax reduction from the start.

The issue is nothing new for the company, or its investors, and it certainly hasn't harmed the stock as the share price remains near its 52-week high tradiing at a price-to-earnings ratio of 82. But if the company doesn't resolve the sales tax issue favorably, investors jumpinng in at current prices may not get the same rewards that has come to those who invested ove the past year when Amazon stock has made a mighty run.

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