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

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

Summary: 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.

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TOPICS: Browser, Amazon
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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, North Dakota and Washington). Since Netflix maintains roughly 43 distribution centers across over an estimated 30 states in its network (these would be referred to as physical points of presence), Amazon would likely be required to charge state sales tax in these physical points of presence. We note that Amazon originally built roughly 20 DC's, but reduced this number to 8 or so in order to minimize sales taxes. This point could be moot, however, as it appears that discussions around state 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.

Topics: Browser, Amazon

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4 comments
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  • One other issue

    I wonder how much the recent increases in postage rates has hammered Netflix.
    tic swayback
  • Netflix sinking fast in my opinion

    Netflix mailed me about 30 pounds of flyers over the last year, so I finally broke down and joined them. When I joined Netflix, they had a decent turnaround time. I live 60 miles from the Austin Distribution center and they would receive my DVDs the day after I mailed them, and ship the next batch out that day, and I would receive it the next day. If I mailed on Monday morning, I had new DVDs Wednesday afternoon.

    Now the turnaround time is Monday to Tuesday of the following week. I talked to the postman, he says the mail hasn't slowed down any, it still gets to Austin the next morning. And anything mailed in Austin by the last pickup (6pm) gets to my mailbox the next day. So the holdup is all on Netflix. They must just let it sit for a few days to keep the volume (and postage costs) down. I read the fine print and it says effectively that is what they do; when a distribution center reaches a certain quota of "ships" for the day, they shut down. Want to bet that quota is going down, not up??

    Add to that the new Blockbuster change-it-at-the-local-store system and I see Netflix losing customers right and left. I'm done with them at the end of the month.

    As far as the taxation thing is concerned, there are ways around it from a corporate legal perspective. Amazon can "own" Netflix without combining the corporations for tax purposes. But if they combine the websites or operations, that won't float with the taxman. Personally I don't see the synergy between Amazon and Netflix, so it sounds like a bad deal to me.
    terry flores
  • Netflix still rocks!

    I have had Netflix for several years now. I have never had a slow response for getting movies. I also love the absolutely huge selection that they have (over 70,000 titles now)!! Now they have instant watch streaming video. It is currently only a handful of the total number of titles, but it is growing fast. The streaming is awesome. I even hooked my laptop to the TV and the picture was really good. It is not DVD quality, but very passable since I never had to leave the house to get it, and it comes as part of the service no extra charge (you get 1 hour of instant watch for every dollar of your subscription each month). I have still to mas out on my instant watch hours, and I watch a lot. being that for us Blockbuster is 10 miles down the road, and they probably do not have anything in the store I would want to watch anyway, then Netflix is the clear winner here!

    I think this would also be good for Amazon. They are starting to get more into other media, and this gives them a huge market share right away. As long as they do not cripple Netflix this would be great for everyone. It would also give Amazon another outlet for selling more videos too (Netflix sells overstock on used videos right now).
    atomicsupergeek
  • RE: Internet sales tax a big hang-up for alleged Amazon-Netflix deal

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