Fortune goes long on Amazon and taxes

How the retailer manipulated a broken government system to get an unfair advantage

I’ve been following the Amazon tax-avoidance story for years now, and I haven’t seen it better-told than it is on the cover of the new Fortune.

Peter Elkind and Doris Burke get nearly 6,000 words to tell the story, and though it’s a bit of a clip job, it’s a very good clip job (ADDING: I should say “clip job” wasn’t the right term to use here. There clearly was a lot of original reporting that went into this story). Sometimes a story is out there in dribs and drabs over years and needs to be synthesized. That’s what we have here.

Fortune really gets at how tax-avoidance is part of Amazon’s DNA, from Jeff Bezos (Fortune latest “Businessperson of the Year”) plotting to start Amazon on an Indian reservation to avoid collecting taxes, to the company’s aggressively disingenuous lobbying to preserve its unfair price advantage, to its eventual capitulation.

There are people who defend this kind of corporate behavior on the grounds that Amazon is simply using the law to save its customers money and to make money for its shareholders. But surely we can all agree that competition should be about who can come up with the best products and services, not who can dream up the best tax-dodging scheme. The simple fact is that it’s companies like Amazon that turn the law into what it is and/or keep it from being changed.

Amazon is expert at many things, but not least among them is exploiting the federalist system. The Supreme Court’s Quill ruling enabled it to get a 5 to 10 percent price advantage on its bricks-and-mortar competitors for the better part of two decades, and federalism also enabled the company to play states off each other for tens of millions of dollars in corporate welfare.

The problem is, our government is too broken to deal with these kinds of practices. It basically only moves against big corporate interests when other equally powerful corporate interests come into opposition.

So the society-wide problem of debit-card swipe fees, which had been abused for years by the financial industry to the detriment of consumers and retailers, only gets quasi-addressed when the giant retailers organize to take on the banks (read The Huffington Post’s “Swiped: Banks, Merchants And Why Washington Doesn’t Work For You,” a Best Business Writing 2012 entry).

And the Marketplace Fairness Act, which would finally allow states to force online retailers to collect sales taxes, only gets traction not because so many states support it and it’s the right and fair thing to do, but because it has the backing of goliaths like Walmart, Home Depot, the rest of the National Retail Federation, plus Amazon too.

That’s right. Now that Amazon has to collect taxes in so many big states because it has physical nexus in the state, it wants to make sure its online competitors do.

As Fortune shows, Amazon has also been a dishonest bully and, let’s not mince words, a tax cheat. The Texas tax story, which was uncovered by The Dallas Morning News five years ago and which serves as Fortune’s lede anecdote, shows that.

In August 2010, Cheryl Lenkowsky, an auditor for the Texas state comptroller, sent a letter to a top tax executive at’s Seattle headquarters. At that point, Amazon had been selling a wide array of merchandise to Texans for 15 years without collecting a penny of sales tax from them. Tax-free shopping was a delight for customers, a vital competitive edge for the company—and a hemorrhaging wound for state government.

Now, Lenkowsky informed the company, all that was about to end. Texas’s audit, which had gone back four years, had resulted in an “adjustment”: a bill for uncollected taxes, plus penalties and ¬≠interest—$268,809,246.36 in all. Added Lenkowsky helpfully: “We have included a pre-addressed envelope for your payment convenience.”

Amazon responded fiercely. It appealed the assessment. It sued the comptroller for her audit records. It lobbied Rick Perry, Texas’s business-friendly governor. Most of all, Amazon insisted it had no “physical presence” in Texas—the basis for the tax claim—despite owning and operating a 630,800-square-foot distribution center (with an flag in front of it) in a Dallas suburb. When all that didn’t work, the company shuttered the facility and threw its 119 employees out of work, vowing to abandon the Lone Star State.

As it threw its fit, Amazon said it had to leave Texas—Texas!—because of its “unfavorable regulatory environment.” Fortune makes a fairly big deal of how the state called Amazon’s bluff on the extortion and ended up getting the company to collect Texas sales last summer along with a pledge of 2,500 jobs and $200 million in investment.

But it’s a mark of the out-of-whack relationship between state and (powerful, out-of-state) corporation that Texas didn’t prosecute Amazon for brazenly breaking the law. Texas didn’t even bother to collect on Amazon’s overdue tax bill. It wrote off the $269 million in uncollected taxes owed as part of the 2012 tax deal with the Seattle company.

With all this background the notion of the company’s policy chief, Paul Misener, wrapping Amazon in the flag is nausea-inducing:

With his cheerful demeanor and gleaming smile, Misener conveys the impression that what cynics might view as resisting taxes is in fact a noble quest to spread jobs and opportunity. Who could be against that? Indeed, Amazon says it’s driven strictly by principle. “Far from an e-commerce loophole,” Misener testified in Congress last August, “the constitutional limitation on states’ authority to collect sales tax is at the core of our nation’s founding principles.” As Misener puts it in an interview with Fortune, “We feel very good about our position because it’s a constitutional right.”

Our modern-day “robber barons in chinos” are so much better at PR than the sharper-dressed originals. But at base, the Silicon Valley ethos is Randian libertarianism dressed up in gee-whiz utopianism and TED-talk guruspeak.

That Amazon is not physically of Silicon Valley because Jeff Bezos wouldn’t collect taxes in California.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,