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Home Publications Blogs Beat the Press Amazon's Tax Breaks Are Essential to Its Survival

Amazon's Tax Breaks Are Essential to Its Survival

Thursday, 29 May 2014 07:03

An NYT article on the battle between Amazon and Hachette, a major publisher, told readers that:

"Thanks to Wall Street’s unwavering support, Amazon could afford to sell books for what it paid for them — something no physical bookseller could do."

While the willingness of investors to pay large amounts of money for the stock of a company that makes little or no profit has been important to Amazon's success, it is also worth noting that through most of its existence it has been exempt from the requirement that it collect sales tax, unlike its traditional competitors. This has allowed it to undercut them in the market giving the company an enormous competitive advantage courtesy of the taxpayers. The savings from not having to collect sales taxes dwarf Amazon's cumulative profits since it came into existence.



Having read through the comments here, I will make a couple of quick points.

1) Don't waste anyone's time or kill any electrons talking about customers being obligated to pay the tax. This is a blog about the real world. No one sends their sales tax to the government for the things they bought on Amazon. What matters is the law as it's enforced, and that means that Amazon's brick and mortar competitors (which includes many Internet sellers) had to collect state sales tax all along. Amazon has just recently started collecting taxes in some states.

2) Not having to collect sales tax is a huge subsidy to Amazon. (Yes, it is a subsidy. States and cities collect revenue -- if Bezos gets out of paying it, then everyone else pays more. It is the same thing as if the governments sent Jeff Bezos a big fat welfare check every year.) And it mattered a huge amount to Amazon's growth and survival. If it thought it could have raised prices by 4-8 percent (the amount of state sales tax) without hitting its market share, it would have done so. The fact that the company has generally operated with near zero profits indicates that collecting sales tax would have been a very big hit.


Note: Typos corrected.

Comments (16)Add Comment
Unlevel the Playing Field: Restore Free Markets with No New Taxes and Drive Cost to Zero
written by Last Mover, May 29, 2014 8:07

Another big commie lie from free market fundamentalist Dean Baker who believes in level playing fields.

How do you expect competition to proceed if not by incrementalism? Read Grover Norquist - no new taxes means no new taxes at the margin, and that means no new taxes for Amazon so it can compete against those still paying them.

It's the only way to drown the government in a bathtub America. We must start somewhere to starve the beast. Start with Amazon and others will follow.

If economic predators can't compete on price in such fiercely competitive markets they must be allowed to compete on differential tax rates.

How else would they survive if not for favorable tax treatment? Productivity? Efficiency? Protectionism? Selective regulation?

The list of enemies against free markets goes on which have managed to squeeze cost to a minimum as usual - except for taxes.

Taxes and the cost of government itself are the last hurdle of excess, unnecessary cost to attain the true minimum cost of production in America - ZERO!

It's true. The creative innovation of economic predators who run the country has finally unleashed the potential of economic cost at the margin to fall to zero if not for taxes.

Do your part America. Support no new taxes. You won't regret it. When prices fall to zero everything will be free from the capitalist private sector, just like it used to be from the socialist public sector. Except this time everyone will pay their fair share:

tax expenditures
written by fresno dan, May 29, 2014 8:14
A tax break is really a government expenditure. So, is this industrial policy decision to undercut local retailers, subsidize internet commerce, and diminish government revenue a good one?
There is also the question of basic fairness - OF COURSE if I can get an 8% discount I will shop at Amazon instead of local, and that pretty much is the only reason. So now we have less local revenue, and OH, less local retail employment. And finally, what kind of economic efficiency is there if the only way a company can exist is with special tax subsidies???
Corporate Poverty
written by Larry Signor, May 29, 2014 8:37
We can't have that...so we subsidize the largest players in the corporate sector. Big Pharma (a Baker favorite), Big Oil (see bp, Exxon-Mobile), Big Ag (the recently passed farm bill), American auto manufacturers (well, we all know), TBTF banks (again, no reference needed), medical practitioners (immigration restrictions and cost of entry regulations), for profit educational institutions (tuition and acceptance of inadequate results w/o penalty), Manufacturing (via military spending: http://fivethirtyeight.com/dat...ble-goods/)...sounds like a lot for those long term unemployment benefits to pay for.
buyers are liable...
written by pete, May 29, 2014 9:32
It was always my understanding that buyers are responsible for sales taxes. For example, buying something on the border in a non-sales tax state and then carrying it home. So this problem is not unique to Amazon. Any direct seller does not collect sales tax if there is no shop in the receiving state. I know I just bought some pots and pans directly, no shipping, no sales tax. Are they driving Williams and Sonoma out of business?
Just all part of the plan
written by Jennifer, May 29, 2014 10:37
“I’m shocked that Amazon would do anything to fuel the speculation that once they grow big enough, authors will suffer,” wrote Hugh Howey, an author who is usually a champion of Amazon’s way of doing things.

Amazon has shown the way-dominate the market by any means necessary-whether that means selling at a loss (but maintaining money flow by investor confidence) or avoiding regulations, then with that domination make everybody else fall in line/destroy all competition. Certainly once the publishers cave and Amazon is really the only game in town, they will cut author payments as much as they can. Uber is following this playbook.
written by skeptonomist, May 29, 2014 10:46
Avoidance of sales tax is a big advantage for Amazon and other internet retailers, but it is hardly their only advantage over brick-and-mortar retailers. Through the internet you can get things that are just not available from local retailers. Shopping for many specialized things is just far more efficient on the internet. Few people drive to a local retailer, get a price, add in sales tax (which is not on the price tag) and then compare to what Amazon charges, adding in shipping - the whole process is different. There is no reason to think that all brick-and-mortar stores would be saved if Amazon had to pay sales tax - although it obviously should be forced to do so. And there is no justification for the claim that freedom from sales tax is essential to Amazon or any internet retailers.
The whole retail business is changing and where it will be 10 or 20 years from now is not predictable exactly, but there will certainly be a lot of electronic retailing. Amazon itself appears to be pursuing a long-term strategy, foregoing profits in the short term to gain market share. It seems to be using a number of tactics that should be subject to anti-trust action. Probably Amazon and other mega-retailers need to be kept under control for a number of reasons - efficiency and "free markets" are often at odds.
Actually in most states Amazon sales are subject to tax, but this is just not enforced. I get a total at the end of the year from Amazon of sales liable to tax, and I believe states get these as well. With more efficient electronic records the tax could be collected by states from buyers. There is also a lot of internet business for which sales tax is collected. As internet sales increase states will probably make more efforts to collect taxes.
@ pete
written by Larry Signor, May 29, 2014 11:04
Perhaps, just perhaps, it is the economics of scale which enhances the Amazon sales tax picture...if a company must collect taxes, they must devise a business model to do so...Amazon would require a much larger infrastructure cost than its competitors, so not having to deal with sales tax would yield the opposite result...a competitive advantage due to scale.
jurisdiction matters
written by pete, May 29, 2014 12:17
No larry, I think if I buy a product in a non-sales tax state, and bring it or ship it to my state, generally I do not need to pay sales taxes. Certainly this works to Amazons advantage somewhat, but no different than other direct sales. I am just saying there is no difference hence advantage for Amazon than other direct sellers.
written by PeonInChief, May 29, 2014 12:48
Most of the Internet shopping I do requires that I pay sales tax, so it's more a matter of selection than taxation. Also if I buy on the Internet rather than traveling to a richer, whiter community to shop, my local government gets the money. And I guess I'm weird, but California has this table we used to compute our estimated tax, and we paid it.
Hold on
written by s ken brown, May 29, 2014 2:17
Amazon is a serendipitous accident like Standard Oil in the late 1800's. Both had revolutionary product and their business model put them outside the law's ability to deal with them per current statutes. Amazon has been functionally exempt from collecting state sales tax but not exempted by the states from collecting it. Persons who buy from Amazon and don't remit sales tax to their state of residence are breaking the law. Amazon could take advantage of the apparent discount by making their customwers scofflaws. Not legal but functionally unenforcable. Their days however are numbered as states close the loophole.
written by Lyle, May 29, 2014 4:34
Note that Amazon now collects sales tax in what I suspect are states that make up a majority of the US population. (However affiliated sellers on amazon do not) Amazon says it now collects sales tax in Az, Ct,FL,Ga,In,KS,Ky,MA,NV,NJ,Ny,NC,ND PA,TN,Tx,Va,Wv,Wi, and Wa.
This list probably captures a majority of the US population. So the advantage is evaporating. This is why Amazon no longer opposes the mail order sales tax bill.
burning brain cells
written by jim, May 29, 2014 5:39
worth considering most sites don't provide free shipping. free shipping cost amazon 3.5 billion last year as compared to 4.5 billion from a sales tax of 6 percent on 75 billion of sales.
Some have been forced to pay that tax!
written by Dave, May 29, 2014 9:41
Regarding addendum #1:

I was audited for use tax by my state shortly after becoming very politically vocal. Because this state is the front for the fascist fight, I do believe it happened because of my political activity.

Anyhow, I always pay use tax on every out of state purchase now. I have no choice, but I think most Republicans in this state are in a different boat.
It may have been the key before, but not now.
written by reason, May 30, 2014 5:15
Amazon is pretty successful in Europe, but it does charge VAT.
It's more than uncollected sales tax
written by s ken brown, May 30, 2014 7:13
I really appreciate this forum. Dean presents lots of info, data and points-of-view I would never kget otherwise. In this case, IMO he comes across a bit shrill in the addendums. The NYT quote says Bezos has capital investors who don't care Amazon isn't profitable and its made him filthy rich. Out of that we get the only reason that matters to Dean is Amazon doesn't have to charge states sales tax because of a loophole which will be closed after protracted wrangling state by state. I think it's much more complex than that. Amazon doesn't have to own bricks & mortar and bear all the associated costs. Amazon doesn't have to own and manage a distribution system (although they found it would help them make a lot more money so now they do but they still don't have to own their affiliates facilities). Amazon has orders of magnitude more connectivity to customers because of the web sites' ubiquity, product range (essentially infinite) and ease of use. I'm only guessing here but IMO Bezos was unbelievably lucky and now he's rolling in dough. Good for him. I don't think for a minute he thought he would make it simply by getting around sales tax. I think he just wanted to sell stuff on the internet. I also think today is a replica of the robber baron era in the late 19th century. Some folks were at the right place at the right time. In retrospect (which is what we're doing here) there were quasi legal activities that would be game changers today but were ineffective at the time.
sales tax v. use tax
written by Ethan, May 30, 2014 3:33
If I, a resident of Chicago, purchase an item in a state with a lower sales tax, and bring that item back to Illinois, I am supposed to pay the Illinois "use tax". A tax on the privilege of using that item in Illinois. The use tax is calculated as what the Illinois sales tax on the purchase would have been if made in Illinois, less whatever sales tax I paid in the state where I actually made the purchase.
Most (read "all") people who do purchase items outside the state, do not report it to Illinois, except -- as in the case of an automobile -- they have to get Illinois title and license plates. I would think I should have to pay the Illinois use tax on an item I purchase from an on line retailer, but I have never been asked by Illinois to do so and I have never really researched it. If I were asked to pay it, that would eliminate the cost advantage of buying by internet.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.