Amazon's looming state tax headache: Could Prime offset a worst case scenario?

Amazon's looming state tax headache: Could Prime offset a worst case scenario?

Summary: Amazon's tax battle with cash-strapped states continues and the various skirmishes could take years to resolve. The big question is what happens to Amazon in a worst-case scenario where it has to collect sales taxes in every state.

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Amazon's tax battle with cash-strapped states continues and the various skirmishes could take years to resolve. The big question is what happens to Amazon in a worst-case scenario where it has to collect sales taxes in every state.

First, let's recap the latest state tax issue for Amazon. Earlier this month, Amazon ended its affiliate program in Illinois after the state passed a law that would require the e-commerce giant to collect sales taxes on purchases by residents.

Under current law, Amazon only has to collect sales taxes when it has a facility, say a distribution center, in a state. State legislatures argue that an affiliate is a location. When a law passes, Amazon drops affiliates and the political battle continues.

Amazon calls these sales tax laws "unconstitutional and counterproductive" since they hurt small businesses (Amazon's affiliates). Amazon also notes that lobbyists backed by retailers are pushing these state tax bills. Amazon has threated to cut off affiliates in California and has already closed programs in Colorado, North Carolina and Rhode Island.

The Wall Street Journal on Thursday highlighted the Alliance for Main Street Fairness, which is pushing the state tax issue. The group has a series of blog posts blasting Amazon for avoiding state taxes. Some say that brick-and-mortar retailers are at a disadvantage due to the tax laws. Amazon obviously disagrees.

But let's fast forward beyond the politics and the play-by-play. What happens if Amazon loses the state tax battle?

For starters, Amazon's affiliate program ends. As noted previously, ending the affiliate program wouldn't hurt revenue.

The bigger issue is what happens when the prices on the street match what you get online. A Journal graphic illustrated how Target, Amazon and Wal-Mart pricing for electronic goods aren't all that different when you factor in sales taxes for all three retailers.

In many cases Amazon is still cheaper, but any shipping cost would probably make the company more expensive. If pricing were roughly equal against all online retailers the following questions about Amazon would be raised:

  • Would convenience of Amazon be the tie-breaker?
  • Does Amazon have the loyalty if it doesn't have an edge in price?
  • How important are state taxes in the online buying decision?

I'd argue that Amazon would probably do fine even collecting sales taxes. Amazon has a loyal customer base as well as subscription buying that can acquire more consumer wallet share. The big unknown is that last question: Do sales taxes matter?

The answer: You bet. I grew up in Delaware---home of tax free shopping---and I still get angry paying a sales tax. Sales taxes stink a little less than ridiculously high property taxes, but you still notice the hit. All things being equal I'll buy a big item online if the shipping is free and the taxes are zilch.

Now if this state tax thing goes against Amazon, the big defense will be Amazon Prime. Amazon recently tossed in free media streaming to its Prime free shipping program. Rest assured, a free Kindle will be added at some point in the years to come.

Simply put, the more perks Amazon can add to Prime the more shipping becomes less of an issue. If Amazon can get revenue from Prime, offer free shipping everywhere and then be efficient enough to undercut rivals on pricing the state tax issue---assuming Amazon loses the state-by-state war---can be neutralized.

It's clear that Amazon has a state tax edge in most cases. If that edge goes away, Prime will become the new differentiator.

Related: Amazon vs. tax happy states: E-tailer could nuke Associates program and still win

Amazon nixes Colorado affiliates; State tax battles proliferate

Amazon adds streaming TV, movies to Prime: Could just be the beginning

Topics: Banking, Amazon, Government, Government US

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  • Astounding loophole

    I find it astounding that some US consumers are able to avoid paying consumption tax that they ought to be paying, simply by buying things on-line. Is this a deliberate attempt to distort markets in favour of on-line sellers, or just an indication of their lobbying power?

    In the EU, Amazon (and others) have no trouble at all including VAT in prices, nor in adjusting VAT in final prices for cross-border purchases. They're obviously just trying to cling to a ridiculous loophole that discriminates unfairly against local shops. If you live in a state with a consumption tax, then you ought to pay it. Full stop.
    WilErz
    • RE: Amazon's looming state tax headache: Could Prime offset a worst case scenario?

      @WilErz And I've always paid taxes at Amazon.ca. That never stopped me. Great service and usually very good prices.
      MikeR666
    • RE: Amazon's looming state tax headache: Could Prime offset a worst case scenario?

      @WilErz I can't speak for every state, but in mine ordering online does NOT exempt you from the tax. Although the vendor doesn't collect it, buyers are supposed to self-report the purchases to the state and pay taxes on them.
      ParrotHead_FL
      • RE: Amazon's looming state tax headache: Could Prime offset a worst case scenario?

        @ParrotHead_FL

        Yep, that's the law in every state. Except somehow an intolerable burden for the individual is expected of the corporation.
        tkejlboom
    • RE: Amazon's looming state tax headache: Could Prime offset a worst case scenario?

      @WilErz
      The problem isn't paying taxes on a ongoing basis, the law in illinois was setup to make amazon go back and retroactively charge sales tax on every item sold since 2006, and they didn't want to have to present their customers with a huge tax bill and deal with the ramifications. I have no problem paying tax for stuff I buy online. I do it all the time, I buy online because it's convenient, there are user reviews, and most of the online retailers I work with have PHENOMENAL customer service.
      dustinhess
    • RE: Amazon's looming state tax headache: Could Prime offset a worst case scenario?

      @WilErz
      There is no consumption tax. There is a tax in state on sales that you make as consumer when you purchase an item "over the counter". It is called sales tax.

      The states have no right to tax by taxing out of state purchases.

      If I make a purchase from the UK on the Internet the States have no right to tax that purchase.

      If I make a purchase by traveling across the State line then my home stat has not right to tax that purchase. Especially in a no-sales tax state such as New Hampshire.

      If I purchase though the mail across state lines the home state has no right to purchase.

      The home state has a right to tax purchases made in the home state.

      There is NO VAT in the States.
      RAV555
      • States have Use Taxes for out of state purchases to support state services

        @RAV555@... Rav is wrong. Most states have a Use Tax that parallels the Sales tax. If an item is purchased without paying a sales tax and is delivered into the state before being used the first time, the use tax is due. Since online purchases are made with credit/debit cards or PayPal etc, it would be easy for buyers to figure the total of out of state purchases.
        The merchant would have its locations in the database and the credit card/debit statement would post such info. Quicken and other financial software could easily track the Use Tax Due purchases based on the Shipped from: and Shipped to fields. The states should discount the online taxes to cover the fact that no state services were used to support the retailer. Those states with a sales tax could charge instate shippers a small shippers tax, say equal to the previously mentioned discount.
        This keeps the issue a state issue with no battles across state lines.
        The annual income tax return would include the reporting of 'out of state' purchases that qualify for Use Tax. The tax payer "signs under penalty" acknowledging to any or no 'out of state' purchases.
        Idadho
      • RE: Amazon's looming state tax headache: Could Prime offset a worst case scenario?

        @MarkGMID, You've got some good ideas there. One problem with the income tax thing is I live in TN where we have no state income tax. The federal income tax forms are obviously not state based and wouldn't and shouldn't have that info on it. The rest of what you say seems well thought out and might work.

        Alhtough, some things to consider: When I'm on travel and make an online purchase while not in my home state, from a retailer also not hosted in my home state, it gets complicated. Even more so if what I purchase is a digital product or service and not a tangible that "ships". In such cases, my home state is not involved at all.
        -------------------
        Other points, not in response to MarkGMID:

        I believe (but I'm not a tax attorney) that state residents are legally obligated to report any purchases they make, regardless of the location of the retailer and the location of the state citizen at the time of purchase. For example, based on this type of law, about 20 or so years ago, NY state collectors started perusing shopping malls in New Jersy, looking for NY state license plates on cares in the parking lots and sending them a tax bill, assuming they were making out of state purchases and requiring them to pay NY sales tax (on top of the NJ sales tax they already paid).

        Bottom line: State tax laws are different between all 50 states AND are always changing. It's largely unfair and a nightmare to keep track of as an online retailer.

        Also, someone said something about "use" taxes. I don't know how it is in other states, but in TN "use" taxes are for businesses, not consumers, if I'm not mistaken. I know when I owned a business in the 90's, I had to pay use taxes on furniture and computers to the state, in addition to the sales taxes I paid when I purchased them. These "use" taxes were ongoing for every year I "used" something I already paid for in full and already paid sales tax on.

        This whole thing is a nightmere.
        Software Architect 1982
      • A retail sales tax is a consumption tax

        @ RAV555@...

        'Consumption tax' is a broad term that encompasses both value added tax and retail sales tax. Others seem to disagree with your interpretation of US tax law in any case.
        WilErz
    • RE: Amazon's looming state tax headache: Could Prime offset a worst case scenario?

      @WilErz Actually, they don't. They (we) simply become tax-cheats. Any time someone buys something from a state that has a sales tax, they are obliged to pay sales tax on it. All states have systems in place with retailers to automatically collect the tax at the time of sale. Ask any merchant and they'll tell you, they don't CHARGE sales tax, they only collect it. The only real difference between the States and EU countries is that we pay the tax in addition to the retail price, while VAT is included in the price.

      There are also cross-agreements with most, if not all states to "share" the tax based on rates, consumption, and the value of the goods. If you buy goods in a state you do not reside, and then take them home, you may be required to pay the tax in that state. But when you return home you are supposed to report the sale, pay the tax, and then request a refund from the original state. Some states will allow you to fill out an exemption form at the time of purchase, like with a computer or car, and then just pay the incremental difference to the purchase state (if any). That state sends the form to your stae, so if you don't pony up, they'll fine or arrest you. It works well with cars, because you pay the tax when you register.

      The people buying computers and appliances online are actually felons if they don't report the sale and pay the tax. But Amazon and others had better be careful, because some say you don't have to pay sales tax when you buy from them, which is a false statement, and may leave them open to prosecution for aiding or encouraging fraud.

      Amazon is just a big bully with deep pockets, who don't want to play by the same rules everyone else does. They're not just stealing sales from local merchants, they're stealing money from local schools, road repair, and health services. Now that their two biggest problems, Andrew Cuomo and Dick Blumenthal are no longer Attorneys General in NY and Connecticut, they will try to string this out even longer.
      JoeBob_z
      • We don't know where an on-line retailer is "located" ...

        @JoeBob_z ... but the rule of thumb is that wherever the BUYER is located is where the sales tax is collected. If the on-line retailer has a "presence" in a state that the sales tax is collected. If the on-line retailer, is NOT located in a state, then the sales ax is not always collected (but, IMO, should be). If the tax is not collected, the buyer is obligated to report on their state tax return that they owe sales tax for that purchase. Who knows how many people really do take on such a bookkeeping nightmare but I'd be that very few do.
        M Wagner
      • RE: Amazon's looming state tax headache: Could Prime offset a worst case scenario?

        @JoeBob_z

        Your summation was onerous, and constitutes a very good reason, in and of itself, why sales tax is largely obsolete.
        tkejlboom
    • RE: Amazon's looming state tax headache: Could Prime offset a worst case scenario?

      I do not think the shoppers were aware except that they found it convenient and in some cases cheaper. As for Amazon, if there was a 'loophole' to begin with, how is it their fault. If the taxes and the laws are that confusing, take it up with the state legislative branch that deals with it and let the lawyers decide - they always do. Anyway it is just a rock and a hard place and will work itself out. Sort of stupid to call anyone bad or evil when the trail can be traced further then the existence of all in question, except the 'law.'
      bcardell@...
    • I'm astounded, too

      @WilErz But what astounds me is that people like you still don't believe that we're taxed enough, and advocate ever more taxes. You say that some US consumers are able to avoid paying a consumption tax that they ought to be paying. Well, just WHY ought they be paying it, anyway? Are you saying that a lack of increased tax laws is an attempt to distort markets? What kind of thinking is that? How THIS for an idea? Put the brick-and-mortar places on a more even footing by ELIMINATING taxes on them! WOW RADICAL!!!
      hipposelect
      • Apples and pears

        @ hipposelect

        Well, the basic idea is that representatives/parties tell you what their policies are (manifestos, debates, etc.), you vote for the one(s) you most agree with, they set the tax rates by majority vote and then you pay the taxes. In a democracy, if taxes are too high, the solution is therefore to vote for people who promise to cut taxes (but, if you're sensible, only if they promise to cut spending too), and to try to convince others to do the same.

        The issue here is simply unequal treatment of businesses: local retailers selling to local consumers are required to collect sales tax, but on-line retailers who sell to local consumers, and are effectively operating virtual facilities locally, are allowed to delegate this task to buyers -- unless they also happen to operate physical facilities locally. There's simply no way that that can be considered fair.
        WilErz
    • RE: Amazon's looming state tax headache: Could Prime offset a worst case scenario?

      @WilErz Spoken like a true European liberal shop owner. We pay enough tax in the US already. Once the states are allowed to force Amazon to collect taxes it will increase unemployment by eliminating all the mom & pop affiliate operators. I've never seen the government touch anything that did not turn to poo! Next the states will want to tax the internet itself for being available in the their state. NO, to more taxes. We are already paying half our income in one form of tax or another in the US. The reason Europe is so screwed up & in debt is because of years of Obama type leadership.
      wrdownig@...
      • So you're in favour of the state distorting markets?

        @ wrdownig@...

        Apparently you're in favour of the state distorting markets to help 'the mom & pop affiliate operators' (but not local 'mom & pop' shops). You're welcome to promote this sort of state interventionism to subsidise a specific group of political favourites if you'd like, but don't pretend it's got anything to do with the level of tax. If the level of tax is too high, the solution is to cut tax rates, not to create loopholes that distort markets.

        As an aside, the overall general government debt is lower in the EU than it is in the US (as a percentage of GDP), and the countries with the biggest public sectors actually tend to be the ones with the lowest debt levels. Indeed, before their property bubbles burst, Ireland and Spain were held up as examples of 'small government' success by supporters of tax cuts. Even Greece had a smaller public sector than the EU average.

        Public debt levels haven't anything to do, of course, with applying tax law equally to on-line and physical retailers. However, you seem to have fallen prey to the myth that a large public sector causes high debt levels. In fact, research has shown that centre-right governments tend to run up more debt than centre-left. There are different theories as to why: some argue it's simply politically easier to cut taxes than to cut spending; others suggest it's a 'starvation' technique -- run up large debts when you're in power so the opposition can't spend more without unpopular tax rises when they're in power.
        WilErz
    • More Taxes?!?!?

      @WilErz All of you MORONZ who LOVE legitimizing MORE taxes are fully welcome to pay mine for me. I've never seen so many posts where people LOVE to pay more taxes. One of the reasons Amazon exists is because people can get out of paying these.
      Obama's a moron and so you.
      P.S. And please spare me the phucking "you're a racist/hater/big business supporter/war monger/..." comments. It only verifies your STUPIDITY!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
      JoeDrt
      • This isn't a new tax

        @ JoeDrt

        This isn't a new tax. It's simply closing a collection loophole by requiring on-line retailers to collect tax in the same way that physical retailers do, as opposed to offloading collection onto consumers the way they do at present. It's a computationally trivial task for retailer, who track all of their sales anyway, but much more difficult for consumers, many of whom unwittingly become tax cheats.
        WilErz
    • RE: Amazon's looming state tax headache: Could Prime offset a worst case scenario?

      @WilErz
      Well, based on experience to date, they are incapable of not assessing city sales taxes on rural purchasers who are not subject to them, but get stuck anyway since the zio code of the mailing address is for the city/town where the post office is physically located.

      If they want to be so picky about their take, then they need to be equally particular about not ripping off purchasers who do not owe them. Fair is fair!
      RadioActive Chief