Slate Takes on Amazon’s Unfair Advantage

The retailer manipulates nexus law to give customers tax breaks competitors can't offer

Slate’s Farhad Manjoo wrote last month about how online retailers like Amazon get a huge unfair advantage over their bricks and mortar counterparts. I want to make sure to note this—it’s a good piece on an important subject.

Amazon’s customers don’t have to pay local sales tax (except in a few states where Amazon has physical locations), which means an automatic 8 or 10 percent discount for its customers. That’s because of the nexus rule created by a pre-Web Supreme Court ruling that says retailers don’t have to collect sales taxes for sales in a state if they don’t have a physical presence there.

But Mazerov argues that Amazon’s actions suggest that taxes have always been a primary consideration. Jeff Bezos, Amazon’s founder, moved from New York to Seattle to start the company. “We could have started anywhere,” he told Fast Company in 1996. “We chose Seattle because it met a rigorous set of criteria.” Among other things, Seattle had lots of talented tech people, it was a nice enough place to attract many more smart people, and it was close to a big book warehouse.

This was true of the San Francisco area, too, which Bezos had also considered for Amazon’s headquarters. But Bezos saw one major problem with San Francisco—it’s in a big state with high taxes, meaning lots of customers would be subject to sales tax if they bought stuff from Amazon. “I even investigated whether we could set up on an Indian reservation near San Francisco,” Bezos told Fast Company. “This way we could have access to talent without all the tax consequences. Unfortunately, the government thought of that first.”

This was sort of cute when it applied mainly to catalog companies and when it helped get Internet retail off the ground in the early years. But these days Amazon is an $80 billion company, or about twice as valuable as Target Corporation, which has to collect taxes on sales on Amazon competitor because its 1,700 U.S. stores are in 49 states (lucky you, Vermont).

Or think about your local independent bookstore, squeezed on one side by Barnes & Noble and on the other by Amazon. Is it fair that the mom and pop businesses have to not only try to compete with a colossus like Amazon but do it when Amazon’s customers get up to a 10 percent discount courtesy of the government?

And this is just shady (emphasis):

So, is Amazon’s tax-free status unfair? Of course it is. As Mazerov points out, Amazon has physical operations in 17 states in which the company and its employees enjoy the fruits of local taxes—police and fire protection, roads, hospitals, and other infrastructure that make its operations possible. Yet Amazon skirts tax collection in most of these places through clever legal tricks. For instance, it has incorporated its warehouses and Web site as separate legal entities in order to argue that it doesn’t really have a presence in Nevada, Texas, and other states. The Kindle offers another example of that strategy—the e-book reader was developed at Lab126, an Amazon office based in Cupertino, Calif. But that office is actually a legal subsidiary, freeing Amazon of collecting any taxes in California.

That deserves much more scrutiny, as does the entire nexus issue. Good for Slate and Manjoo for pointing this out.

It’s no small thing. At a time when states are flat broke, they’re losing out on some $8 billion a year in direct tax revenue because they can’t tax online retailers like Amazon. Meantime, they’re also losing jobs and more indirect tax revenue as local retailers struggle to compete against an unfairly subsidized behemoth.

Further Reading:

LAT Raises the “Nexus” Sales-Tax Issue

The New Rules Project: Internet Sales Tax Fairness

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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: , , , ,