The American Senate has passed – with a fairly overwhelming 70-24 majority – an early version of the “Marketplace Fairness Act”, which aims to give states a route to collect sales tax for goods sold online. That progress will please one of the bill’s most surprising supporters: Amazon.
In the US, sales tax for mail-order purchases is supposed to be paid in the state of the buyer, not the seller. This means that the retailer doesn’t charge any tax, and the customer is supposed to declare that they owe a certain amount to their state’s tax collector. In practice, of course, this doesn’t happen, and purchases from out-of-state retailers are essentially tax-free.
Naturally, retailers who do have to pay sales tax – both brick-and-mortar stores and online retailers shipping largely to their own state – are unhappy with this state of affairs, as are the people in charge of trying to plug the multi-billion dollar shortfall that occurs. But the support of Amazon is less obvious: after all, the company takes advantage of tax planning measures worldwide, and ships a huge number of things across state lines, avoiding tax in the process.
But Amazon has fought this battle before. Until a few years ago, it stubbornly resisted paying sales tax, but in Autumn 2011, it switched course. Slate‘s Farhad Manjoo reports that:
Over the course of the next couple years, Amazon will begin collecting sales tax from residents of Nevada, New Jersey, Indiana, Tennessee, Virginia, and on July 1, it began collecting taxes from Texans. It also currently collects taxes from residents of Kansas, Kentucky, New York, North Dakota, and its home state of Washington.
As Manjoo points out, the reason for the shift is pretty clear. If you’re trying to deliver things within a week or two of their being ordered, it makes sense to centralise your operations in one state to minimise your tax take. But if you’re trying to deliver within a day or two – or even an hour or two – of the order, you’re going to need physical locations in every state, and most major cities. And if that’s the case, then you’ve given up your tax advantage – so it makes sense to get your competitors to give up theirs, too.
So the Amazon of today can’t use the sales tax loophole, because it’s not shipping out of state any more. And if it can’t have it, no one else can either.
That’s going to be a shock to brick-and-mortar retailers, who might have hoped that more equitable tax treatment would make competing with the company easier. But fundamentally, they are having the same problems that HMV had: Amazon isn’t impossible to compete with because it avoids tax; it’s impossible to compete with because it has no real desire to make a profit.
Forcing the company to pay tax may raise its prices slightly; but they will still be lower than almost any competitor could match. And the loops it jumps through to avoid that tax – like not being based in state – are things that competitors can use to their advantage. In other words, small retailers of the world: be careful what you wish for.