September 17, 2012

Amazon tax cheating ends in California


On Saturday, Amazon started doing something it tried mightily to avoid: collecting sales tax in America’s most populous state.

As the Los Angeles Times reports, California officials say that Amazon may collect as much as $100 million per year, about half the revenue the state estimates it will earn from a 2011 regulation mandating online retailers to collect sales tax on products shipped to customers in California. Consumers will pay between 7.25% to 9.75% depending on where a buyer is located.

And it’s not just California that has pushed through new rules on sales tax: Amazon will shortly begin collecting taxes in New Jersey and Virginia and over the summer started collecting taxes in Texas and Pennsylvania.

Amazon’s efforts to avoid collecting tax in these states were documented in an exhaustive report in the Wall Street Journal last year. The company’s tactics included preventing company employees from traveling to states where Amazon refuses to collect tax (called “bad states” in internal Amazon documents) and issuing fake business cards to employees (which deceptively claimed they worked for the company’s digital business, “Amazon Digital Services”).

Collectively, the policies were meant to help the company defend its position that it had no “physical presence” in most states. When pushed by state governments, Amazon also suspended affiliate sellers to be able to keep dodging tax obligations.

All of this mischievousness was just the secret end of Amazon’s tax-avoidance schemes, which also included fighting various state governments in court. When California changed its laws in 2011 and closed Amazon’s tax loophole, the company claimed the move was “unconstitutional” and then said it would fight the measure vigorously in court. It eventually backed down and agreed to start collecting sales tax after a year-long grace period—err, or after a two decade-long grace period—in a deal negotiated by California Governor Jerry Brown.

The Journal investigation concluded that Amazon “believes its sales-tax policy is critical to its performance.” And it pointed to a study by Credit Suisse that

estimated that if Amazon were forced to collect sales taxes in all states, it would lose as much as $653 million in sales this year, or 1.4% out of an estimated $45.5 billion in revenue.

But a terrifying story in the New York Times by reporter David Streitfeld shows that Amazon is already well on its way to adapting to the new tax regulations, in part by building two large warehouses in California, to serve Los Angeles and San Francisco. The idea is for Amazon to eventually pull off same-day delivery in the two cities. None other than Jeff Bezos, Amazon’s CEO, came out to tout the new initiative. (Bezos refused comment to the Wall Street Journal when it wrote about tax issues in above-mentioned story, but now that there’s a positive spin to put on the story, I suppose he’s happy to talk.)

Bezos admitted that same-day delivery is probably a ways off. It’s more likely, he said, that Amazon could cut a day off of its two-day shipping offering, which includes its $79 a year Prime membership program.

Reducing shipping costs is an increasingly important issue for Amazon. As we reported in July, Prime and other shipping deals are deeply hurting Amazon’s net revenue. Total shipping costs currently account for $500 million a quarter more than what the company actually collects in shipping fees.

But same-day services represents another threat to independent retailers who fought so hard to get the state of California to force Amazon to collect tax.

As Amy Thomas, the owner of the Pegasus bookstores in Berkeley and Oakland, told the New York Times, “It’s hard to keep putting out fires everywhere. They sell e-books. They’re becoming publishers. And now they want to do same-day shipping. They’re an octopus.”



Kelly Burdick is the former executive editor of Melville House.