Asymmetrical Information - Megan McArdle

05.06.13

Why is Amazon Supporting an Internet Sales Tax?

Shifting business models mean that sales tax is no longer a competitive advantage

It looks like the Marketplace Fairness Act--the official name for a proposal to allow states to collect sales tax on internet sales made to their residents--will pass the Senate sometime today.  It will have a tougher time in the House, where Republicans still aren't keen on supporting anything that smacks of higher taxes.  Still, it's remarkable, at least because it shows that under the right circumstances, you can get at least some members of the GOP to support a tax increase.

I wrote about this plan a couple of weeks ago, noting that the biggest issue with the bill is the disproportionate burden it will put on small businesses.  Amazon can afford to pay a small army to hassle with states who claim that Amazon isn't paying enough tax.  Mom's Cupcake Bakery and Cable Store cannot.  

The really interesting story of this whole case is Amazon's shift from a staunch foe of taxing the internet, to one of its biggest boosters.  A few years back, Amazon was waging a scorched-earth campaign against states that attempted to collect sales taxes from internet businesses.  For example, when various states passed laws claiming that affiliate links represented a physical nexus in those states that would allow them to collect taxes, Amazon said they were closing down associates who were residents of those states.  

Both the states and Amazon clearly believed that freedom from sales tax constituted a major competitive advantage for Amazon.  Yet a few years later, they're all sunshine and smiles when it comes to taxing the internet.  In fact, they're lobbying for it.  Why the shift?  

Because, whatever the history, Amazon's competitive advantage no longer derives from its tax-free status.  Amazon is the cost leader on most products even before you add in sales tax.  They're a marketplace killer because their giant warehouses are vastly more efficient than even a big box store.  They require fewer staff per customer, and they don't have to be decorated nicely.  They can be located in the middle of nowhere, instead of prime shopping mall real estate.  (Bonus: wages in the middle of nowhere tend to be lower than in dense urban areas).  And you don't have to air condition them to the point where an Emperor Penguin could happily summer in the cell phone section.  (Though at one point Amazon seems to have decided that you didn't need to air condition them at all, which was a problem.  They've since upgraded their warehouses with more creature comforts).  

Amazon doesn't need to be salestax free to compete with brick-and-mortar resellers; it needs volume, which it has, and convenience, where it lags slightly behind the big boxes.  The solution is to open more warehouses closer to the customers.   Next day and same day delivery will increasingly become the norm, especially in urban areas.   But to pull more business from bricks-and-mortar, Amazon warehouses will become a little big more like big box stores: nearer and more numerous.

Those warehouses indisputably are a physical nexus.  A taxable physical nexus.  In other words, getting closer to the customers means . . . paying sales tax in more states.  

If you have to pay tax anyway, shouldn't everyone else have to, as well? An argument that Amazon saw as unreasonable five years ago, when it came from bricks and mortar stores, comes to seem eminently sensible when it's you fighting off competition from smaller shops.  Amazon has reportedly poured millions into lobbying for this bill.  Small wonder it's poised to pass the Senate; smaller etailers don't have nearly the lobbying muscle, and they certainly don't have a chorus of governors urging their Senators to the state government out in these troubling fiscal times.

For all the complaints, this is not actually going to raise that much money.  Supporters of the bill claim that it will raise about $23 billion a year; opponents say it's more like $3 billion.  But even the higher number is about 0.1% of total state and local spending for 2012.  Internet retailing seems like a huge deal to folks in the media, who are much more likely than average to order a huge fraction of their purchases online. The overwhelming majority of taxable sales are local, however, and will be for the foreseeable future.  We spend most of our annual budget on groceries and restaurant meals and movie tickets and similar things that can't really be shipped.

So the interesting story here is not the budget question, but the business question: what does this tell us about the future of the marketplace?  The answer is that it's going to be big: Amazon, not eBay sellers.  The jewelers and other small retailers who wrote to me complaining that they couldn't compete unless Amazon was forced to charge sales tax are going to be sorely disappionted; they'll never be cost competitive with Amazon no matter what they do.   The internet sales tax isn't going to level the playing field between Amazon and local retailers.  It's just going to move Amazon closer to the end zone.