Why Amazon Loves Equal Sales Taxes

So the Senate is looking at this Main Street Fairness Act to collect sales taxes from online retailers. The knee-jerk reaction, of course, is that e-tailing giant Amazon.com (Nasdaq: AMZN  ) would have to start collecting sales taxes on everything it sells. Some might term the bill an Amazon killer.

Amazon itself "strongly supports" passing this bill into federal law, and it said so in a press release yesterday.

Shock! Horror! Let the shareholder lawsuits commence, as Amazon clearly has gone insane!

My memory is great, just very short
But this isn't actually news -- it's simply another reminder that Amazon actually wants a standardized sales-tax system across state borders. The company supported an earlier version of this bill, shoulder-to-shoulder with traditional bricks-and-mortar retailer Sears. Back in May, CEO Jeff Bezos told Consumer Reports that the current state-by-state rules are just too darn complicated:

"Our point of view on this is that we should simplify the sales-tax system, and we've been insisting on this for 10 years. We support the streamlined sales-tax initiative, and 22 states have signed on. The right way to fix this is with federal legislation. Sales tax is very complicated."

Yes, it is. At the moment, there are more than 7,500 taxing jurisdictions in this country -- states, counties, cities, transit authorities, and the list goes on -- each with its own set of rules and regulations.

Is Bezos a hypocrite?
This from a company that killed Amazon affiliate programs in states including Illinois and California when those states passed local laws that would require affiliate parent Amazon to pay taxes in their states. Tax-collection issues have been named as the reason Amazon hasn't bought digital-video expert Netflix (Nasdaq: NFLX  ) yet -- because those pesky DVD shipping centers would create a collection requirement in every state.

You might think a company with that kind of history would be on the other side of the unified tax-collection fence, right alongside known bill critics eBay (Nasdaq: EBAY  ) , Facebook, and Yahoo! (Nasdaq: YHOO  ) .

Adding taxes to every Amazon invoice would just erase a key business advantage from Amazon's arsenal, right? No CEO in his right mind would endorse government crews driving in with dump trucks and backhoes to fill up that hard-won pricing moat.

Amazon's not-so-secret weapon
OK, so passing the Enzi-Durbin-Alexander bill might level the playing field with physical stores. There's still a pretty wide moat made from a lack of overhead costs, though. Sears needs to staff, stock, power, and maintain its physical stores; Amazon staffs a relatively small number of shipping centers, packed to the gills with high-tech efficiency tools that reduce operating costs.

And maybe that's exactly why Amazon likes the taxation idea, as long as it's applied to every one of its major rivals. The support statement gleefully notes: "It's a win-win resolution -- and as analysts have noted, Amazon offers customers the best prices with or without sales tax."

From Bezos' point of view, we'd see inefficient e-tailers falling by the wayside while the real winners -- such as Amazon -- continue to thrive. Amazon will of course keep its tax bill as small as possible by managing its geographical business footprint, but there's no reason to fight a blanket taxation that applies equally to everyone, everywhere. It's a culling of the online-retailer herd. You could interpret the opposition from eBay and Overstock.com (Nasdaq: OSTK  ) as a sign of weakness. Are these guys scared of coming out on the losing end in this proposed rebalancing of the online marketplace?

Roadblocks ahead
The bill is not a slam-dunk deal, even with its bipartisan and cross-sector support. Some critics argue that the cutoff level for applying the new rules is too low at $500,000 in online revenues. You'd end up taxing a lot of small businesses that are barely scraping by to begin with. Only the tiniest single-family sellers would evade new tax obligations, and half a million in sales with a gross margin of perhaps 10% wouldn't exactly create wealth. As eBay puts it, "It does not make sense to expand Internet sales tax burdens on small businesses at a time when we want entrepreneurs to create jobs and economic activity."

Fair enough; the current proposal isn't perfect. But if this bill doesn't pass in its original or some modified form, another attempt will come behind it. The age of tax-free online retail is coming to an end in our lifetime, people.

Amazon will keep killing Sears and Wal-Mart with or without revised taxing rules. Learn more about the e-tailer's business advantage in this free report, unabashedly titled "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." Grab your copy -- this eye-opening special report is totally free.

Fool contributor Anders Bylund owns shares of Netflix but holds no other position in any of the companies mentioned. The Motley Fool owns shares of Yahoo! and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Yahoo!, Netflix, Wal-Mart, Amazon.com, and eBay, and have also recommended creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.


Read/Post Comments (6) | Recommend This Article (2)

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  • Report this Comment On November 10, 2011, at 10:22 PM, SpaceVegetable wrote:

    Amazon does have another benefit over many of its online rivals: it has negotiated very tough deals with the major shipping services and probably has lower shipping costs than most of them. That's not a small expense, either, and it's one that bricks and mortar retailers don't have, which narrows the "moat" somewhat. With consumers demanding more and more "free shipping", the retailers are having to absorb more of those costs, since shipping isn't free and someone eventually has to foot the bill.

    Ebay doesn't get the shipping advantage because it isn't really a retailer. Ebay is a venue where a multitude on online retailers do business. Shipping costs and pretty much all other costs are the responsibility of the various sellers. Ebay just provides a single place with mechanisms to offer sales listings and manage payment processing.

    Other online retailers don't have the scale of Amazon, so they won't benefit as much as Amazon from a level tax playing field. Of course, online sales have never really been tax-free, except for those living in states with no sales taxes. The problem is that consumers simply don't pay what they owe to the states. This is not the fault of the retailers, despite with the so-called "Main Street" retailers would claim.

    As a small retailer myself, I would support a single streamlined tax rate and collection mechanism. What I can't afford is to manage 7500+ tax jurisdictions with all the various associated rules and regulations, not to mention the reports that have to be filed with all those jurisdictions. Sure, technology can provide a solution, but it would either cost money, which small businesses like mine don't have to spare (given we're competing against bigger operations with lower unit costs and thinner margins). Or, it would involve third parties inserting themselves into the transactions, getting access to customer data that can be valuable to a small business and would be detrimental if sold to other parties. It's tough enough to compete without having all your customer data sold to your competitors.

    Whatever happens, I would hope they think through the possible consequences before anything gets passed. Otherwise we'd end up with another debacle like what happened after the credit card "reforms" that were passed (*all* my own credit cards all ramped up rates in excess of 22% after that mess of a law was passed). We small businesses don't need *that*

    kind of help, thanks.

  • Report this Comment On November 10, 2011, at 10:23 PM, Popnfresh100 wrote:

    This is a great explanation for Amazon's stance.

    Many smaller etailers might still be exempted from collecting sales tax under a system of state laws. Amazon knows they can't compete with that.

    Still, I don't really buy that Walmart, Sears and crew aren't still the bigger beneficiaries. Marginal costs are what really drives prices and sales- not overhead- and absent a tax disadvantage large brick-and-mortar operations have the lowest marginal costs due to their lack of need for delivery.

    For Amazon, the national sales taxes is simply the lesser of two potential punishments.

  • Report this Comment On November 11, 2011, at 12:29 AM, lucasmonger wrote:

    Think of the bigger picture. How much tax revenue has disappeared because of the Internet tax-free status that they've enjoyed for years. Our deficit is in bad shape, we need these taxes. Amazon isn't going to go under because or lost sales due to the sales tax. They're still very competitive on price alone.

  • Report this Comment On November 11, 2011, at 9:56 AM, TMFGortok wrote:

    I can't help but wonder what this is going to do to the Independent Software Vendor. You may 'ra-ra' taxes because it's 'revenue' (ok, it's actually taking money from more productive sources and transferring it to a non-productive source), but what's this going to do to jobs? If I were an ISV, I can't imagine having to borrow money just to start a business so I can meet some tax burden.

    Amazon is for it because it hurts their competitors. At this time of crisis, do we really need to be penalizing the people who actually create jobs?

    We don't have a revenue problem: We have a spending problem. You can't solve a spending problem with more taxes, and you certainly can't fix the mess we're in by taxing the small businesses that provide a non-trivial amount of jobs in this country.

  • Report this Comment On November 11, 2011, at 12:04 PM, xcergy wrote:

    Is this only just about Amazon? What of the rest of online? Amazon represents less than 20% of all online sales. Amazon is using vertex.com to calculate tax, then is passing along those costs (2.9%) to their 3P sellers. A win-win for Amazon, as they found a new revenue stream.

    As an online seller, I oppose this legislation. A B&M has one store w one location and one tax rate. Even with simplified tax rules, online would still need to file 45 tax returns. Bad enough that I need to keep up with over 100 tax districts within my own State (and no tax district is defined by zip code). For small sellers, the administrative costs could easily cost more than the tax collected.

    Yes, there is a better solution. Have the CC Processors collect and remit Use Tax @ POS (States pay related fees) ~ States get instant funds ~ no privacy issues ~ paperless for online ~ no exemptions required ~ system would work for B&Ms as well as online ~ eliminates merchant account fees sellers pay now on Sales Tax collected.

    facebook.com/groups/stop.sales.tax.fees.now

  • Report this Comment On November 11, 2011, at 7:10 PM, PhilipCohen wrote:

    Taxes, taxes, taxes! Who wants to pay taxes? Particularly those easily avoided income and company taxes that the international players, such as the eBafia/PreyPal, do so easily avoid? Nobody. But, don’t worry, when the sovereign US is finally declared insolvent, like Greece/Italy/…, that one percent—mostly those “patriotic” exporters of jobs and importers of cheaper goods/services—who will by then have amassed most of the wealth of the country, will come to the aid of the other ninety-nine percent: this new “aristocracy” will employ some of you as vassals, just like used to be the case a couple of hundred of years ago in Great Britain. The rest of you? Well, you will slowly starve to death because you won’t even have a plot of land big enough to subsistence farm on. Just like the Irish of old, you will have to find another country to emigrate to.

    Of course, the simple answer to many of the US’s problems would be for the feds to instead collect a uniform GST/VAT on all commercial goods and services sales (including on imports)—except “small” sellers—in place of the mish mash of varying state sales/buy taxes, and return that income, in a weighted manner, to the states. But I guess that would be too hard for the US, even though many other civilized countries now have such a federal tax. The Greeks don’t like paying tax either and look were it’s gotten them ...

    Having said that, surely, no none can seriously believe that eBay’s stance on this matter is born of a concern for the protection of anyone but eBay itself. Notwithstanding that, eBay’s greater problem is getting itself protection from its own executive management who are clearly a bunch of arrogant, ignorant, unscrupulous, narcissistic, sociopathic, probably congenital, imbeciles.

    Enron / eBay / PayPal / Donahoe: Dead Men Walking.

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