the audit

Amazon takes a tax hit, finally

Reuters reports early signs that collecting sales taxes affected the company's sales
January 18, 2013

Reuters reports that Amazon’s fourth quarter results may take a hit from new laws that force it to collect sales taxes in California, Texas, and Pennsylvania.

Best Buy says its online sales outperformed in those three states compared to the rest of the country, while analysts say Amazon’s sales look like they underperformed in those states.

Tax avoidance is part of Amazon’s DNA–Bezos considered starting the company on an Indian reservation to escape taxes–and it has long fought having to collect state and local sales taxes, arguing (fallaciously) that doing so would be just too hard to figure out.

An ill-timed 1994 Supreme Court decision found that mail-order catalogs didn’t have to collect local taxes if they didn’t have a physical “nexus” in the state. Consumers still owed owe the tax, but almost none of them knew this and fewer yet actually paid it. That decision became the basis for Internet retailers to avoid collecting sales taxes everywhere except their home state.

As Amazon grew it needed warehouses across the country–not just in Washington state, where it always collected sales taxes on orders–to ensure fast delivery. But building anything meant it would have nexus in a new state and thus have to collect sales taxes there. So Amazon began the old corporate welfare game, dangling jobs in front of politicians, playing states off each other, and sometimes effectively blackmailing states to win exemptions from collecting taxes. It avoided locating in big states like California and New York as long as it could and sometimes obfuscated whether it was actually in a state or not.

In 2008, The Dallas Morning News published an excellent investigation that found Amazon had been operating a distribution center in Irving, Texas, under a subsidiary name without informing the state. It had actually misled the comptroller’s office by saying Amazon had no operations in the state. The comptroller didn’t know about Amazon’s warehouse until the Morning News rang up. Texas sued for $269 million in back taxes and Amazon shut down its warehouse in retaliation, claiming, presumably with a straight face, that Texas had an “unfavorable regulatory environment.” The company eventually settled, agreeing to collect taxes.

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In the meantime, the delaying tactics paid off for Amazon, which was able to undercut the total cost at bricks and mortar retailers by 7 to 10 percent on taxes alone. It’s now a $122 billion company–the second biggest retailer, behind only Walmart–by market capitalization. Reuters gets a smart quote on this:

“This makes Amazon equal to everyone else. They no longer have that sales tax advantage,” said Anne Zybowski, vice president of retail insights at Kantar Retail. “If this had happened to Amazon when they were just a bookseller years ago, they may not be as big as they are now.”

Other Internet retailers benefited too, of course, from this state of affairs, as did digitally savvy consumers (who tend to skew wealthier, by the way). Last year, the nexus exemption cost states $23 billion in tax revenue.

But Amazon is the goliath online. And Reuters misses here in not noting that Amazon only collects sales taxes now in a handful of states. The Institute for Local Self Reliance’s Stacy Mitchell puts the number at eight, with Amazon agreeing to collect in seven more states by 2016.

This Reuters quote about sums it up:

“Amazon was wise to hold on to the sales tax advantage as long as they did,” said Sucharita Mulpuru, an analyst at Forrester Research. “They obviously felt that they were strong enough now, with enough other profit pools, that acquiescing to state authorities would not have an adverse impact on their business.”

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.