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 Amazon.com 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 Amazon.com 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 Target.com 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
I don’t know if I entirely agree with the premise here. You say that Amazon has an unfair advantage over brick and mortar retail outlets because online sales (usually) are exempt from sales taxes and while that’s true you usually have to pay shipping on items which in many cases more than makes up savings on the tax end. While it might be true with the Mac that Manjoo compared overall price with, I thinks that example is more an exception than the rule.
For example, I recently purchased an item at Amazon that cost 23.99 and paid 5.58 in shipping. Had I bought this at a traditional brick and mortar store, I would have paid 23.99 for the item (assuming I could have matched Amazon’s price) plus another 2.40 in sales taxes making it cheaper than Amazon. I went with Amazon because I knew the item was there and didn’t have to go to a half a dozen retail outlets to find it, I can read reader reviews of the product and be confident its not a lemon and Amazon has about the best return policy of any retailer (except Wal-Mart) that I have done business with.
Interesting though, Manjoo wrote about this nearly a month ago and you are just now getting in on the pile on? This piece wouldn’t have anything to do with Amazon kicking Wikileaks off their servers now would it?
#1 Posted by Mike H, CJR on Wed 8 Dec 2010 at 10:05 AM
Oh, brother, Mike H. Bugaboos everywhere! Here's the deal, if I had a problem with Amazon's Wikileaks thing (which I haven't followed much), I would write a column about why Amazon's Wikileaks thing is bad. This is pretty simple.
And as to your main point, I think Amazon's shipping costs are probably more than evened out by retail rents. But that's irrelevant--those are pure business costs on a level playing field. Tax exemptions are not.
#2 Posted by Ryan Chittum, CJR on Wed 8 Dec 2010 at 02:08 PM
Oh, brother, Mike H. Bugaboos everywhere! Here's the deal, if I had a problem with Amazon's Wikileaks thing (which I haven't followed much), I would write a column about why Amazon's Wikileaks thing is bad. This is pretty simple.
I’ll just say that the timing dovetails rather neatly into the “Amazon sucks because they booted Wikileaks” that’s going around.
And as to your main point, I think Amazon's shipping costs are probably more than evened out by retail rents. But that's irrelevant--those are pure business costs on a level playing field. Tax exemptions are not.
I am sure you have some empirical data to substantiate the shipping/rental costs evening each other out? And its most certainly not irrelevant, e-commerce is an entirely different business model with a completely different fixed cost structure!
#3 Posted by Mike H, CJR on Wed 8 Dec 2010 at 02:45 PM
"700 U.S. stores are in 49 states (lucky you, Vermont)."
And in five of those states there's no sales tax: Alaska, Delaware, Montana, New Hampshire, Oregon.
I wonder how merchants in those states would feel about being required to collect sales tax for the other 45 states and the 7500 or so taxing jurisdictions therein?
And while the description of Amazon's tactics as "clever legal tricks" they are none the less legal, are they not? Frustrating to many states, but none the less legal.
#4 Posted by Michael Walsh, CJR on Wed 8 Dec 2010 at 03:34 PM
Thank you for the thoughtful article. As you correctly point out, states are missing out on billions per year in uncollected sales tax revenue on remote (mainly internet) purchases.
The Main Street Fairness Act now pending before Congress would ensure that local businesses do not have to continue competing over price with internet-only retailers that are escaping their obligation to collect sales tax.
It is better that Congress address this issue so that all businesses collect the correct tax. Until then, more and more states are going to be attempting on their own to collect these taxes, which will 1) raise privacy concerns and 2) raise more fairness issues since not all consumers will be contacted to pay up.
#5 Posted by Beatrice Vaccaro, CJR on Thu 9 Dec 2010 at 02:35 PM
"Unfair advantage"? No. "Clever"? Yes. And praiseworthy, to boot: any time a private entity successfully defends itself against Leviathan, it is a victory for liberty. Bravo, Amazon! (In any case, why attack the productive, private service-provider on behalf of the destructive central monopoly?)
#6 Posted by Dan A., CJR on Thu 9 Dec 2010 at 06:27 PM
The US constitution created a system in which the states have to compete with each other. It's called the "commerce clause". Look it up. States with sales taxes are losing the competition, states without a sales tax are winning the competition. If you want the loser states to be more "fair" to their in-state retailers, then get them to stop making their IN state retailers collect their sales taxes. Alternatively, get those states to push for a national, simplified sales tax - and Congress will set aside the commerce clause restrictions on sales taxes.
#7 Posted by Taxpayer, CJR on Mon 15 Aug 2011 at 11:35 AM