Amazon chart

Amazon has been firing on all cylinders. Sales grew 51 percent in the second quarter, and at the same amount in North America and internationally. It was the e-commerce giant’s strongest quarterly growth in a decade.

But with growth, comes a cost. Amazon has been adding employees, gobbling up other companies and also racking up potential legal costs related to its growth. The investments and other spending were the reason why Amazon's net income decreased 8 percent to $191 million in the second quarter.

The added spending and potential future costs include a potential $1.5 billion tax adjustment, and hundreds of millions more in increased expenses to build out technology and distribution capacity, Amazon revealed in a SEC filing Wednesday.

In a note to investors, Dan Geiman, an industry analyst with McAdams Wright Ragen, said that Amazon was unable to contain its expenses, as it invested in capacity and Amazon Web Services and significantly increased marketing expenses, with much of the marketing spending going to promote Kindle.

Geiman noted that Amazon’s operating expenses increased 63 percent, with a 62 percent increase in fulfillment expenses as Amazon catches up.

Amazon has ramped up its acquisition activities this year. In the first half of 2011, Amazon has spent $686 million acquiring new companies, compared to $40 million during the first half of 2010, according to Amazon's SEC filing.

In March, Amazon won regulatory approval to buy to buy Quidsi Inc., which owns Diapers.com., for $500 million in cash and $45 million in debt.

Amazon says net sales from the acquired companies in the first half of 2011 were $169 million, while net losses were $20 million.

Amazon also has been rapidly expanding its distribution centers.

Amazon CFO Thomas Szkutak told industry analysts Tuesday that the company plans to continue to expand its distribution centers. Amazon has about 50 distribution centers and has previously said it plans to add 15 more in 2011. Szkutak said Monday that Amazon will probably surpass 15.

In 2010, Amazon added 13 distribution centers.

Amazon reported that its rental expenses for operating, capital and financing leases for equipment and office, fulfillment center, and data center facilities were $85 million in the second quarter of 2011, compared to $53 million from the same quarter a year ago. For the first six months of 2011, Amazon’s lease expenses were $159 million, compared to $100 million for the first six months of 2010.

Amazon also has potential problems with the tax man.

Amazon says the company recently received a notice of proposed adjustment from the IRS for the 2005 and 2006 tax years relating to transfer pricing with their foreign subsidiaries. The proposed adjustment would “result in additional federal tax expense over a seven year period beginning in 2005 totaling approximately $1.5 billion, subject to interest.”

Amazon say sit would “vigorously contest” the IRS proposed adjustments.

Amazon also continued to be impacted by state efforts to force the e-commerce giant to collect sales taxes. Amazon is backing a ballot measure in California to overturn a new law requiring Amazon to collect sales taxes. Amazon notes that “retailers are generally liable for any amounts that should have been, but were not, collected under the law.” But Amazon said it is “unable to estimate a range of possible future liability related to the new sales tax collection requirement” in California.

Amazon also faces potential payouts related to patent-infringement lawsuits from competitors, including recent suits from GPNE Corp. and Walker Digital LLC.

Amazon says it cannot predict the impact of its patent battles. Alcatel-Lucent USA Inc. sued Amazon in 2009 saying Amazon’s website technology and digital content distribution systems infringe six of Alcatel-Lucent’s patents. Amazon noted that Alcatel-Lucent estimated that Amazon could be forced to pay up $106 million. But Amazon estimates the maximum damages would be less than $7 million if Amazon loses the case.