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Amazon: Let's Play Diversion

 May 01, 2012 08:47 AM

(By Karl Denninger) This is going to get good.

As everyone is by now aware Amazon had "blowout" earnings, sending the stock up $30, or 15% to $226.85.  As one of the "high-flying darlings" of the world today they're a great stock to own right here and now, right?

Not so fast.

Buried in the rah-rah was the fact that the company agreed to collect and remit Texas sales tax, as they have facilities (warehouses) in Texas.  Amazon has been quietly reaching these deals of late, and will be collecting and remitting tax in 12 states, making up ~40% of the population, by 2016. 

The problem Amazon has is part of the "law of large numbers."  Long-standing law says you need "nexus" to be forced to collect and remit sales taxes.  "Nexus" is defined as some sort of business presence or connection to the state in question; without it there is no jurisdiction and therefore no ability of the state to impose a legal duty to do something.

[Related -Level Watching and Swing Trade Planning for Amazon (AMZN)]

Amazon has for years set up subsidiaries and played other games to allow them to locate warehouses around the country while not collecting sales tax.  They have to do this to control shipping costs, as shipping is distance-sensitive -- as volume goes up there comes a point where it is far less expensive to put a warehouse in a given place than ship product the extra 500 miles. Amazon's tax-dodging strategy is a dubious practice that has come under attack by various jurisdictions (in my opinion with good cause) as this is not so simple as hiring someone to deliver something (e.g.

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