Internet sales tax a big hang-up for alleged Amazon-Netflix deal

Amazon is allegedly pondering a purchase of Netflix, but rumor mongers may want to ponder some tax implications before jumping the gun.

Netflix (NFLX) shares were last up almost 6 percent on rumors that Amazon (AMZN) was interested in acquiring the movie rental site.

Now let's entertain these rumors, which appear to emanate from a Jackson Securities analyst or industry press reports, which may just be quoting that analyst. In either case, I can't find the story where this rumor started.

But there is one real issue--Internet sales taxes, which could come this fall. Currently, if an e-commerce company has a location in a state it has to charge a sales tax. For Amazon that means it has to calculate a sales tax for a handful of states. Netflix is located in many more states due to its 43 distribution centers.

Those distribution centers would mean that Amazon would have to charge sales taxes in nearly all states. That fact could crimp demand and potentially increase costs due to information system tweaks.

Bank of America analyst Brian Pitz highlighted the issue in a research note today:

"Amazon currently charges taxes in Kansas,Kentucky,NorthDakotaandWashington). Since Netflix maintains roughly 43 distribution centers across over anestimated 30 states in its network (these would be referredtoasphysicalpointsof presence), Amazon would likely be required to charge statesalestaxinthese physical points of presence.We note that Amazonoriginallybuiltroughly20 DC's, but reduced this number to 8 or so in order to minimize sales taxes. This point could be moot, however, asitappearsthatdiscussionsaroundstate taxation have been revived in the past weeks - and state taxation of goods sold online could be imminent but with an uncertain timeline."

In other words, Amazon could buy Netflix now and hope the state taxation issue gets resolved (it won't). Given that Amazon is playing with a stock currency that has nearly doubled in a just a few weeks a purchase today may make sense.

More likely, Amazon will wait until the tax issues get sorted out before pouncing on Netflix.