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.