Are Amazon’s days as a (mostly) tax-free merchant coming to an end?

Retail analyst David Strasser, a managing director at Janney Montgomery Scott, suggests that they could be. “There’s a lot of momentum building,’’ he said Friday. “(Amazon founder) Jeff Bezos has built a company strategically around avoiding sales tax. But they’re going to have to deal with this,” he added.

Wait a minute. Hasn’t Amazon successfully fended off pesky state tax collectors for 16 glorious years? Yes, but the battle has entered a new stage as Amazon builds warehouse/fulfillment centers in more locations, states grow hungrier for revenue, and a rising sales tax rate (it now averages 9.64% nationwide) puts retailers who do collect tax at an ever bigger disadvantage.

There was a time when I would have scoffed at the notion. And truthfully, I think that it’s great that online retailers got that benefit when they were just starting out so that we would get used to buying things online (which was once considered scary by some and foolish by others). Besideswhich, it seemed that what you saved in sales tax you lost in shipping (wherebouts). These days, though, you can almost always get something cheaper online with or without sales tax. When I lived in a state that did collect sales taxes from Amazon sales, I still purchased from Amazon.

But what started off as a perhaps-needed inducement to get people to shop online has basically become a tax loophole. It has also incentivized inefficient behavior, purchasing something from across the country rather than from down the street. And it puts some states at a real disadvantage. People who live in Pullman, Washington, for example, have to pay the sales tax while people who live six miles down the road in Moscow, Idaho, do not. And whenever I am on eBay, I remain glad that I am not a Californian because it seems that most of the stuff I order is from California. And, of course, Barnes and Noble’s early online push had to compete with Amazon while the former (generally) had to collect sales tax and the latter (generally) did not. Does it make sense to punish B&N for having storefronts and reward Amazon for not having them?

Of course, there are three things stopping us. First, people like the idea of tax-free and so it’s often an unpopular thing to do. I don’t think I am completely alone in coming around on this, though. And there has been movement in many states to see if they can find a way to collect it. That brings us to the second problem:

The back story is well known: In 1992, the U.S. Supreme Court ruled in Quill v. North Dakota, that only sellers with a physical presence (“nexus” in taxspeak) in a state are required to collect that state’s sales taxes. Just shipping into a state by say, FedEx or UPS, isn’t enough to establish nexus. Consumers still owe “use” (meaning sales) tax to their states, but few bother to pay.

Several years back, there was a big to-do in Delosa when the State Treasurer went after the State Insurance Commissioner (both were expected to be vying for the same job in the next election) for not paying sales taxes on some furniture he bought from abroad. It was expected that the Treasurer was trying to make his potential future opponent look bad as a “tax-dodger” but instead it just reminded everyone that they’re “tax-dodgers” too, in this regard. About the only place this is regularly enforced is with cars, because they can easily verify what they need to when you go to register it.

Anyway, back to the subject at hand. So the second problem is that there is a jurisdiction problem. I guess it’s hard to make a company that doesn’t have so much as a business license in your state pay taxes to it, though I’m not sure how this differs from income taxes. I know that as the resident of a state with an income tax and as an employee of a company without one, my employer is still legally bound to take withholdings for my home state. It’s one of the things that has been holding up my contract. I suppose they make some sort of distinction between collection and withholdings, or employees and customers. But the courts have spoken.

So then we have to the third problem, which is that the entity in the best position to do anything about it is not the one that would reap the benefits. Congress would be essentially seen as “raising taxes”, which is a political liability, without actually getting any of the revenue that comes with it. If they’re going to be tax-raisers, they might as well have an interstate sales tax that they collect themselves, if that’s constitutionally permissible (just about everything else is under the commerce clause).

So what happens now? Amazon relies pretty heavily on its affiliates. When one or two states threaten to collect sales taxes, Amazon can write off that state’s affiliates. But when every state does it, they could lose all of their affiliates and a lot of their utility. That would leave an opening for an affiliate-based rival to offer nearly as wide a selection as Amazon, but with sales tax. Amazon might indeed win such a war based on price, but it would hurt. Or Amazon and Affiliazon could both lose to eBay, which has an amazing selection, good prices, and is nearly impossible to tax, though also has a chaotic marketplace (hard to find what you want) and trust issues.

Of course, even if Amazon itself throws in the towel, the overall inefficiency problems are not solved. It still makes sense to order something from across the country on eBay than buy something across the street. It would ultimately just put Amazon in similar footing with B&N, Walmart, and so on. Which would be good for the competitors, though it doesn’t really solve this problem:

State officials have long lamented the shortfall and sought ways to collect a bigger portion by using a mix of education and threats. California, for instance, expects to be shortchanged $1.15 billion in 2010 from e-commerce and catalog sales, according to estimates from the state Board of Equalization.

Amazon is surely responsible for some of that, but so are a lot of others, who are not such easy targets.


Category: Market, Statehouse

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12 Responses to The Taxman Visits the Amazon

  1. Maria says:

    California ain’t being short-changed nothin’. We’ve got the highest state sales tax in the nation and the highest state income tax also, and we are still bankrupt because we are ruled by criminals and incompetents who suck up to welfare beneficiaries and greedy universities sticking their hands out incessantly demanding “more, more, more”.

    The criminals in Sacramento have money to spend on “free” college tuition for illegal immigrants while American citizens go sick and hungry, so as far as I am concerned, they can whistle in hell for “their” online sales tax money.

    No more feeding the monster.

  2. trumwill says:

    I am approaching this question less from the perspective of what tax levels should be (or what they should be spent on). Perhaps it would be better for states facing budget shortfalls to cut spending, but absent that I think taxing Amazon is a better solution than raising other taxes over all.

  3. Peter says:

    If Amazon and other big online merchants have to start collecting sales tax, they won’t always be price-competitive with traditional merchants as buyers won’t be able to offset handling and shipping charges with the savings on sales tax.

  4. trumwill says:

    Ten years ago I would have been worried about that. But I think what they lose in shipping costs, they more than make up for in inventory savings. Easier to have a huge, dusty warehouse in Kentucky than to manage inventory on a storefront in Chicago with more limited space that has to be maintained for customers walking through. And economies of scale, of course.

  5. Mike Hunt says:

    http://www.nytimes.com: California, for instance, expects to be shortchanged $1.15 billion in 2010 from e-commerce and catalog sales, according to estimates from the state Board of Equalization.

    The word I have bolded shows the typical attitude of both the drive-by media and the government bureaucracy. If the money isn’t in the government’s pocket, they must have been shortchanged. Nevermind if they deserve the money in the first place.

  6. trumwill says:

    Nevermind if they deserve the money in the first place.

    Except that they have the law on their side. The issue is that they don’t have the means to collect it. I would agree with you on, for instance, an income tax that Washington doesn’t have or a sales tax that Oregon doesn’t have. But Idaho (to pick an example that is not California) has, in its infinite wisdom, decided that people should pay a 5% premium on goods purchased while in Idaho. This isn’t about a new tax, but rather enforcing one that is already on the books (and doing away with the perverse incentives of ordering things from outside of the state).

  7. Abel says:

    People who live in Pullman, Washington, for example, have to pay the sales tax while people who live six miles down the road in Moscow, Idaho, do not.

    Cry me a river. People who live in Pullman, Washington don’t have to pay state income tax while people who live six miles down the road in Moscow, Idaho do.

    And I love how states are blaming high tax rates on Amazon. Please. These taxes would have gone up with or without Amazon (and other online retailer) sales tax revenue.

  8. trumwill says:

    Unless they work in Moscow, then they do pay income taxes.

    Ultimately, though, it comes down to fairness. Why should Idaho taxpayers get a pass compared to Washington taxpayers? More to the point, why should the state of Idaho have to have higher tax rates in order to collect the same amount of revenue*? This isn’t the product of some incentive that targets desired behavior. It encourages people in Idaho to order things from out-of-state. It encourages inefficiency.

    This isn’t hypothetical when it comes to the Gem state. Idaho has high tax rates (7.8% of income, 7% corporate, 5% sales) but low collections and spending. It’s a leaky tax system. Amazon is one of those leaks. So, to compensate, they have to have high tax rates just to pull in less money than three quarters of the other states.

  9. Mike Hunt says:

    Except that they have the law on their side.

    Well of course they have the law on their side; the lawmakers make the laws, as tautology would suggest. That doesn’t make the law just.

    This is a matter of perspective. Some people feel the government has every right to stick its beak into every transaction its residents make, and some people feel the opposite. People from NY are famous for doing their shopping in NJ, because we don’t have a sales tax on clothing. Would you care to guess how much money is sent to Albany on such purchases?

    Why is there even a sales tax in the first place? The question may be beyond the scope of this blog, but I feel it is a fair one. When I go out to eat, I am paying a de facto 22 percent tax on my meal (7 to Trenton, 15 to the server).

  10. Abel says:

    Will,

    I’m still waiting for politicians to say “Once we fix our leaky sales tax system, we’ll lower our sales tax rate.” Of course that will never happen. Once they get the extra revenue, they’ll keep the rates sky high!

    Also, if they need to compete with states with lower sales tax rates, why not just lower theirs and get out of staters to shop in Idaho?

  11. trumwill says:

    Why is there even a sales tax in the first place? The question may be beyond the scope of this blog, but I feel it is a fair one.

    There are arguments for and against each individual tax. Income taxes can be progressive, but they tax work and why do you want to disincentivize work? Property taxes can also be progressive, but it also means that all land is ultimately owned by the government because you have to pay the government to keep it. And sales/excise taxes. Regressive, but more easily targeted.

    In a perfect world, I would have each level of government tax something different. So when you’re paying your income tax, you’re cursing the federal government. When you’re paying your sales tax, you’re cursing the state. When you’re paying your property taxes, you’re cursing your local governments. Instead, the name of the game is to apply taxes to as many different things as possible. Increasing revenue streams, they like to call it.

    In the real world, though, that would make income taxes unbearably harsh and the others too comparably light.

  12. trumwill says:

    Idaho did actually lower their sales tax from 6% to 5% a while back, but shortly thereafter they restructured, lowered the property tax, but raised the sales back to 6.

    Really, though, whether they charge 6% or 5% or 4%, the Internet, as well as two neighboring states, charge 0%. How do you compete with that? One way or another, they need money to operate. For some states, every new revenue stream is an excuse to just spend more. But for others, it’s a question of how most fairly to collect the taxes. Allowing people that order stuff from out of state a pass while charging those that do business locally is a pretty inefficient way of going about it.

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