It was a bit of an anticlimax last Saturday when Amazon
(NASDAQ:AMZN) finally started collecting sales tax on purchases from California buyers. After all, the argument that online retailers should be exempt from sales tax obligations because the Internet needed a little boost got old some years ago, especially for Amazon.
The company will start charging sales tax next year in New Jersey and Virginia, and in 2014 in Indiana, Nevada, and Tennessee. It already collects taxes in New York, Kansas, Kentucky, North Dakota, Pennsylvania, Texas, and Washington.
That’s a fair stretch of the country and, not coincidentally, it consists of states in which Amazon has or plans to have distribution centers.
This is less a surrender than a pivot to a new business strategy for the online retail giant. Amazon has decided that delivery speed is more important to its customers than sales tax savings.
The company knew all along that it couldn’t have both.
Only two years ago, Amazon was so determined to avoid sales taxes that it shut down a distribution center in Texas when the state sent it a $269 million tax bill. The company signaled that it was willing to close facilities and even cut loose third-party partners from coast to coast. Its claim to sales tax-free status was based on a 1992 Supreme Court decision that businesses had to collect sales tax only for states in which they had physical operations.
The Supreme Court didn’t have the Internet in mind in 1992. Which is small comfort to Amazon’s online competitors like Target
(NYSE:TGT) and Wal-Mart
(NYSE:WMT), which have physical operations everywhere.
By 2010, cash-strapped states were interpreting the decision to include Amazon distribution centers. The Los Angeles Times estimates
that California will collect up to $100 million next year from Amazon alone. And, the state is staffing up on auditors, lawyers, and tax collectors to go after other online retailers.
Amazon’s capitulation to California gave it an opening to build two huge new distribution centers, near Los Angeles and San Francisco, which will make it a whole lot quicker and cheaper than schlepping goods from Nevada and Arizona, as it has been doing.
In fact, Amazon CEO Jeff Bezos told the New York Times
that closer distribution centers can shave up to a day off its two-day shipping times, making “next-day delivery” an easy promise in and around most big cities in the US. No confirmation of the rumor that Amazon is aiming for a “same-day delivery” option, a concept that everyone loves until they consider the huge cost.
Even so, some have wondered if Amazon’s low-margin business can thrive through the change. The New York Times
says the company currently “is investing so heavily in the warehouses that it is barely profitable.”
There should be less concern that Amazon will lose business to rivals, now that it doesn’t have that tax-free price edge. An analyst who does regular price checks told the Los Angeles newspaper that Amazon prices beat the competition by 5% even with the addition of sales tax. Moreover, a survey by Wells Fargo
suggests that Texas consumers didn’t bat an eyelash after Amazon started charging them sales tax in July. They cited convenience ahead of any sales tax savings as reasons for shopping on Amazon.
The analyst concluded that “Sales tax collection is not likely to materially impact Amazon’s sales even as the company starts collecting in more states.”
Good thing, since other states perked up at California’s victory. Just this week, Massachusetts chimed in, with the state’s mayors sending an open letter
to the governor advising him to put the screws to Amazon right now, so they get the benefit of the upcoming holiday season.
At this point, the states are hurting so bad that Amazon looks like a good citizen for caving in. As sfgate.com puts it in an editorial
: It's one thing for small businesses to avoid the hassle of collecting sales tax on out-of-state customers. But it's high time the giants stepped up to collect a fair share.”
That hasn’t stopped anybody from offering advice to consumers on how to keep evading sales taxes. For instance, some third-party Amazon affiliates may not be collecting sales tax outside their own states. Same goes for many of the small stores on eBay
(NASDAQ:EBAY). And the California tax collectors haven’t caught up with Overstock.com yet.
But these handy tips always come with this stern warning: If a retailer does not collect sales tax on your purchase, you still are obligated to pay it with your state income tax return. There is anecdotal evidence that several taxpayers have actually done this.
No positions in stocks mentioned.
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