Why Amazon Fights State Sales Tax, But Supports It Nationally

AmazonLogo200x20Amazon will begin charging sales tax on goods purchased by customers in Connecticut, Massachusetts, and Wisconsin today, after fighting such regulation for years. That brings the total number of states which require sales tax on Amazon purchases up to 16, affecting roughly 163 million people. The Wall Street Journal notes that this is “a milestone of sorts” as now over half of Americans see the taxes on their purchases. Amazon is still fighting similar regulation in the 34 other (less populous) states that don’t yet require it.

But the story isn’t quite as simple as the Journal, and others, have made it out to be. While Amazon aggressively fights state sales-tax laws, it supports the Marketplace Fairness Act, a bill that would apply sales tax nationwide to all online purchases. That seems strange, but its actually a shrewd business move designed to undercut current competition, and pave the way for Amazon’s future goals.

Sales Tax is Inevitable, and Amazon Knows it:

As seen in the cases of today’s three states, Amazon is slowly losing their battle to remain a tax-free retailer. This was almost inevitable once they began racking up billions in sales each year, and directly competing with stores like Barnes & Noble, whose brick-and-mortar locations bring states revenue on multiple fronts. Small businesses complained of an unfair advantage, and states didn’t like missing out either. Technically, citizens are supposed to track how much money they spent on online goods and pay back the estimated sales tax on their tax returns, but it’s a little known, and even less followed rule.

When states first began to regulate Amazon, the company was probably worried that forcing sales tax on its customers would make them less likely to purchase their goods online. Amazon thrives on undercutting prices (or so goes the traditional wisdom), and such laws could make their value-proposition less enticing. Except that logic doesn’t actually hold up.

A Wells Fargo analyst in 2012 measured the effect of the state’s recent sales-tax legislation on online purchases, and found no statistically significant changes in buying behavior. In fact, most shoppers seemed unaware that the change had occurred. Assuming that the 2,600 Texan customers surveyed serve as a relatively normal sample of the population, the report shatters the traditional price-argument.

Amazon isn’t unaware of such reports, nor was it likely that the report came as a surprise to them. Amazon analyzes everything, and they were certainly tracking their sales numbers to see the effects of such legislation on their business. So if Amazon knows these laws don’t hurt sales, why are they continuing to fight them? The answer, it seems, comes down to a mixture of fairness, business leverage, and future planning.

No One Wants to Go It Alone:

Right now, a lot of the states that make Amazon pay sales tax don’t apply that rule to other online retailers, like Overstock, or eBay. In these cases, Amazon is not only raising their prices relative to brick-and-mortar stores (which might not matter), but having to play on an uneven ecommerce field as well. The Marketplace Fairness Act would apply state sales tax rates to all online purchases, leveling the field. Instead of having to track and deal with varying state regulations in each marketplace, a nationwide act would let Amazon focus solely on services and brand-value across the country.

Sales Tax as a Competitive Advantage:

Another big reason I suspect Amazon is pushing for a nationwide sales tax, yet fighting against any state tax (even though it doesn’t hurt their sales), has to due with rivals like eBay. Both eBay and Etsy lobbied against the Marketplace Fairness Act in the Senate, and argue that it places too high a cost on small sellers.

For eBay, its sellers would have to learn to manage the tax rates for each different state, a hassle that could cause some to simply stop selling. This isn’t such a concern for Amazon however, as it sells directly to consumers. There may be some effect on its 3rd party sellers, but those are often larger outfits, with more resources, than single sellers on platforms like Etsy.

The Future is Local (Even Though It’s Global):

Finally, Amazon has always been focused on reducing shipping times and expanding its infrastructure. That’s the reason for features like Prime, which accustom users to a level of delivery speed that other retailers can’t easily match. It’s also pretty much the entire reason why Amazon hasn’t ever recorded a net profit, despite making $17 billion in revenue last quarter. They reinvest all their money in infrastructure development. They’re eventual goal is same-day delivery across the country, which means a warehouse (or two or three) in every state.

The only problem is that opening up warehouses in new states makes them susceptible to that state’s sales tax laws. The centers also bring hundreds of jobs however (although the quality of these jobs is debated), giving Amazon bargaining power. Remember, Amazon knows these laws are probably inevitable (and is supporting their nationwide adoption), but that doesn’t mean they’re just going to let every states tax them at will. The Marketplace Fairness Act is awaiting a Congressional vote (with no scheduled date yet), and state politicians want jobs now, rather than later. So Amazon makes a calculated stand against state laws, hopefully securing better terms for themselves, while pushing for comprehensive reform nationwide. You could view it as hedging, or call it shrewd negotiating tactic, but either way Amazon s is coming out ahead.

While it may look like Amazon is fighting a losing battle (and is often reported that way), businesses would do well to study their example. When faced with a dilemma that appears to be inevitable, they chose to maximize their current advantages (holding out on a statewide basis and securing better terms) while limiting their future losses (supporting nationwide adoption, and incorporating it into their business model). Instead of fighting against it, Amazon has used sales tax as an advantage both locally and nationally. It’s move like this that explain why Andreessen Horowitz partner Sam Gerstenzang calls Amazon the one company that inspires “universal fear” in Silicon Valley entrepreneurs.


Born in Alaska, Cameron is now a resident of Nashville, TN. He graduated from Sewanee: The University of the South with a degree in English and Political Science. He enjoys following emerging technology and its impact on business. Follow Cameron on Google+, or email him with any questions or comments.

Add Comment