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.

About 

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.

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16 Comments

  1. Stephen

    Very good article! One thing I don’t think many people realize is that some states have a “Sales and Use Tax”, which basically means that if you purchase something online (i.e. from Amazon.com), have it shipped into your home state, and the seller didn’t charge any Sales Tax, then you still have to pay the tax, as a Use Tax to your home state! So one way or another, the tax is suppose to be paid, it just depends on who collects/pays it – the Seller or the Buyer.

  2. Eric Perry

    This is really interesting.  I definitely like the prospect of ordering something online and getting it with in a 24 hour period.  I see great things happening with Amazon, beyond what they have done already.  However,  I have really enjoyed ordering items from amazon, and I know that many people who have enjoyed not paying sales tax.  Although, there are other online retails out of state that you can order from at a slightly higher price and still not pay sales tax.  Really, I don’t think this will hurt amazon what ever action is taken, but I will say that careful shoppers will compare their items to other online retailers to make sure they are getting the best deal.

  3. M

    I’m not entirely convinced by your article.  Here are alternative explanations and corrections to what you wrote.
    1) Maybe they are pushing a National Sales Tax as a stalling mechanism, figuring/hoping that Congress will take forever to get their act together.
    2) How hard would it be for Ebay and other like retailers to implement a program that automatically calculates the sales tax based on recipient’s delivery address?  Not very.  Don’t see why that would ever be a complication that merchants would ever have to deal with.  The bigger problem is that small sellers dealing on razor-thin margins can’t eat up the tax cost the same way that Amazon can, which is probably what Ebay fears.  They don’t want to lose online retailers.
    3) Amazon isn’t negotiating better tax terms.  It is required to pay the same sales taxes as all other retailers.  The article you linked just shows that Amazon settled a back-taxes claim with Texas by promising to invest in the state.  Basically Texas used leverage to get Amazon to do something.

    Best

  4. Noodles McGee IV

    If the US state sales tax system wasn’t so damn complicated they’d have more smaller online businesses register for taxes.  The way it is set-up now makes it impossible for a small business to charge sales tax without paying for 3rd party solution (or spending boatloads of time they don’t have figuring it out) even if they wanted to do it.  It costs of tons of money to be compliant.  Compare it to other countries around the world and trying to figure out what tax rate to charge is way too complex.

  5. 3ofUs

    I buy far less from Amazon now that it charges me sales tax. Its price advantage disappeared and is often more expensive than buying locally.

  6. mikeschr

    @3ofUs   But you already owed the tax before – you were just supposed to pay it yourself.  So your objection to Amazon is that they stopped helping you evade taxes?

  7. Cameron Graham

    @M Thanks for the comment! Let me address some of your points.
    1. I think that could be a factor, but they aren’t exactly pushing a National Sales Tax, as in a flat-rate nationwide. The legislation they support actually just authorizes all states to collect tax on resident’s online purchases. Stalling could be a factor, but I don’t think it’s the main one. 
    2. Etsy and Ebay both cited the confusion it would cause independent sellers as a reason for opposition, although I agree that margins are probably an equally large concern. Based on how often sales taxes can change, and the minute differences in how goods are taxes (such as different rates for the same product based on its quantity/packaging), building such an automatic calculator could very well be extremely challenging and time-consuming. Either way though, we both agree that the threat to Ebay and Etsy (and similar sites) is losing their sellers, and the legislation Amazon is pushing would make that more likely.
    3. Amazon absolutely negotiates for better terms. Florida wrote off $269 million in back-taxes in order to keep to Amazon around, as long as they collect taxes going forward. The state would never write off a sum like that for a smaller retailer. That isn’t Texas forcing Amazon’s hand. And it’s not an isolated example. In South Carolina, for instance, they convinced the state to allow them to start collect taxes in 2016 – almost 5 years after they built their distribution center there. The state at first refused, until Amazon threatened to build its center somewhere else.

  8. TamaraRandall

    Eric Perry I appreciated your view regarding receiving items purchased within 24 hours. That is still a nice advantage even if prices are going up a bit due to sales tax inclusion.

  9. Brnfnk

    I believe that Amazon should be charged sales tax for every state, it is a huge advantage over local companies as well other online retailers. Typically Newegg and Amazon have similar prices, but because newegg changes me saletax I end up going with Amazon. However in Tennessee amazon emailed out “pay for your tax amazon purchases” after the user had paid. This seems very sketchy to me how they hid the tax’s until long after the purchase was made

  10. Hillary M

    Interesting read. Sounds like Amazon has a good plan no matter what happens. I can see the argument for the Marketplace Fairness Act either way – it seems unfair that Amazon gets taxed while others do not, but I also agree taxing all companies could really hurt Etsy and other smaller sites.

  11. Eric Perry

    This is really interesting.  I definitely like the prospect of ordering something online and getting it with in a 24 hour period.  I see great things happening with Amazon, beyond what they have done already.  However,  I have really enjoyed ordering items from amazon, and I know that many people who have enjoyed not paying sales tax.  Although, there are other online retails out of state that you can order from at a slightly higher price and still not pay sales tax.  Really, I don’t think this will hurt amazon what ever action is taken, but I will say that careful shoppers will compare their items to other online retailers to make sure they are getting the best deal.

  12. Stephen

    Very good article! One thing I don’t think many people realize is that some states have a "Sales and Use Tax", which basically means that if you purchase something online (i.e. from Amazon.com), have it shipped into your home state, and the seller didn’t charge any Sales Tax, then you still have to pay the tax, as a Use Tax to your home state! So one way or another, the tax is suppose to be paid, it just depends on who collects/pays it – the Seller or the Buyer.

  13. Noodles McGee IV

    If the US state sales tax system wasn’t so damn complicated they’d have more smaller online businesses register for taxes.  The way it is set-up now makes it impossible for a small business to charge sales tax without paying for 3rd party solution (or spending boatloads of time they don’t have figuring it out) even if they wanted to do it.  It costs of tons of money to be compliant.  Compare it to other countries around the world and trying to figure out what tax rate to charge is way too complex.

  14. 3ofUs

    I buy far less from Amazon now that it charges me sales tax. Its price advantage disappeared and is often more expensive than buying locally.

  15. mikeschr

    @3ofUs   But you already owed the tax before – you were just supposed to pay it yourself.  So your objection to Amazon is that they stopped helping you evade taxes?

  16. Cameron Graham

    3. Amazon absolutely negotiates for better terms. Florida wrote off $269 million in back-taxes in order to keep to Amazon around, as long as they collect taxes going forward. The state would never write off a sum like that for a smaller retailer. That isn’t Texas forcing Amazon’s hand. And it’s not an isolated example. In South Carolina, for instance, they convinced the state to allow them to start collect taxes in 2016 – almost 5 years after they built their distribution center there. The state at first refused, until Amazon threatened to build its center somewhere else.

  17. TamaraRandall

    Eric Perry I appreciated your view regarding receiving items purchased within 24 hours. That is still a nice advantage even if prices are going up a bit due to sales tax inclusion.

  18. Hillary M

    Interesting read. Sounds like Amazon has a good plan no matter what happens. I can see the argument for the Marketplace Fairness Act either way – it seems unfair that Amazon gets taxed while others do not, but I also agree taxing all companies could really hurt Etsy and other smaller sites.

  19. Brnfnk

    I believe that Amazon should be charged sales tax for every state, it is a huge advantage over local companies as well other online retailers. Typically Newegg and Amazon have similar prices, but because newegg changes me saletax I end up going with Amazon. However in Tennessee amazon emailed out "pay for your tax amazon purchases" after the user had paid. This seems very sketchy to me how they hid the tax’s until long after the purchase was made