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By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
Amazon battled states for years to avoid having to collect sales taxes. Walmart was on the other side of the fight, along with state revenue offices. Walmart had to add sales taxes to all its sales in California, whether online or brick-and-mortar, which at the time ranged from 7.25% to 9.75% depending on location. For shoppers, that price difference was reason enough to switch to Amazon. It was in essence a massive taxpayer subsidy for Amazon.
But Amazon lost that battle and started charging sales taxes in California in September, 2012. State after state followed. By early 2017, Amazon was charging sales taxes in all 45 states that have state-wide sales taxes and in Washington DC.
Still, even in 2016, online retailers dodged paying $17.2 billion in sales taxes on out-of-state sales, according to the National Conference of State Legislatures. For them, it’s a massive price advantage that other retailers didn’t get.
The fight over sales taxes is based on a Supreme Court case of 1992 – Quill Corp. v. North Dakota – that barred states from forcing companies to collect sales taxes if they didn’t have physical facilities in those states, such as stores or warehouses.
For Amazon, this got increasingly complicated as it is building out its distribution network, with warehouses and facilities around the country. So now Amazon is collecting sales taxes.
Problem solved? Nope.
Amazon only collects sales taxes on sales of inventory that it owns (first-party sales). But Amazon is also a platform that sells merchandise owned by other sellers (third-party sales). About half of the goods sold on the Amazon platform fall into this category. Amazon leaves sales tax collections to the 2 million merchants on its platform. But they claim that it’s not their job to collect sales taxes, and most of them don’t collect them. Hence, third-party sales still get the taxpayer subsidy.
Amazon isn’t the only out-of-state retailer or platform. It’s just the biggest one. eBay and many others are impacted by it too. Legally, this remains murky. But states and brick-and-mortar retailers are fighting to get the subsidy scrapped.
“It’s a fairness issue,” Minnesota Senator Roger Chamberlain told Bloomberg. “Right now, there’s an unlevel playing field that disadvantages brick-and-mortar stores.”
And December 1, just in the nick of time for the holiday sales season, could be a big turning point.
An amnesty agreement in 24 states — including Florida, New Jersey, and Texas but not California and New York — and Washington DC has been hammered out by Multistate Tax Commission (MTC) that would provide Amazon merchants partial amnesty from back taxes if they agree, among other things, to register and collect sales taxes no later than December 1.
Online sellers with potential tax liability could negotiate a settlement that could lead to some or all of their back-taxes being forgiven. The catch? Online sellers must meet certain eligibility requirements and apply for amnesty between August 17, 2017 [and] October 17, 2017. They must also voluntarily disclose their tax obligations by submitting a voluntary disclosure agreement.
“It’s not clear how many merchants will sign on,” according to Bloomberg. “Because so many have complained about the tight timeline, the states are holding a meeting on Wednesday [Oct. 11] to decide whether to extend the deadline.”
And there are more complications – the promise of 50,000 jobs:
Amazon has launched a nationwide search for a second headquarters location that could employ up to 50,000 people. So states taking an adversarial position against Amazon by trying to collect taxes are simultaneously trying to lure the company for a major investment. Sellers fret that Amazon will have leverage to push the tax collection burden onto them.
“Sellers are scared,” Paul Rafelson, a corporate tax attorney advising these sellers on the amnesty agreement, told Bloomberg. “They don’t think they did anything wrong, but they don’t know if they can afford to get caught. They want to know why the states aren’t going after Amazon like South Carolina.”
South Carolina is not part of the amnesty agreement, but is among the states that have taken this into their own hands. Bloomberg:
South Carolina is going after Amazon directly in court, saying it owes $12.5 million in back taxes, penalties, and interest from third-party sales. Amazon has vowed to fight the case.
Minnesota … in June enacted the country’s first law requiring companies like Amazon and EBay Inc. to collect sales taxes on goods sold by third-party sellers. They’ll have to comply in 2019 – or even sooner in the event the Quill ruling is overturned.
Washington followed with a similar law that takes effect in January.
Massachusetts, meanwhile, got a court order forcing Amazon to turn over by mid-October the identities of marketplace sellers doing business on the site since 2012. That could set off a scramble among states competing to collect back taxes, says James Thomson, a former Amazon senior manager who now advises merchants how to sell on the marketplace. “If Massachusetts succeeds,” he says, “it’s going to be a bloodbath.” Amazon has yet to indicate if it will provide the records or challenge the ruling.
Congress could clarify the situation and create a set of rules for all states, instead of letting states create a cumbersome patchwork, but that hasn’t happened yet. So, for now, as online sales continue to surge, it’s up to the states to determine who will be responsible for collecting sales taxes: The platform (Amazon) or the third-party seller.
In this battle, sellers want Amazon to collect sales taxes, while Amazon wants sellers to collect sales taxes. However this will ultimately be settled, they both appear to have lost the two-decade battle to dodge sales tax collections.
Other retailers have never been able to benefit from this vast taxpayer subsidy. They have to compete on price without it. Some of them have been driven out of business. Sales taxes are no fun for consumers, but a level playing field will give other retailers belatedly a better chance to fight off Amazon, but only after Amazon has already gotten so big, in part due to this subsidy, that practically no one can fight it off.
After Amazon acquired Whole Foods, the first thing that happened was a panoply of strategic price cuts, promoted by the media with enormous hoopla. It was ingenious marketing. The media fell for it. And consumers flocked to Whole Foods to see for themselves. Here are the numbers. Read… Amazon-Whole-Foods Already Rattling the Grocery Sector
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I used to be a seller on Amazon. I did both Seller fulfilled orders and FBA (Fulfillment by Amazon). Finally I just got fed up with the hassles of dealing with Amazon and closed my seller account a few months ago. The last “stranded inventory item” just got shipped back to me by Amazon yesterday. As a former seller I can tell you that forcing the sellers to collect sales taxes is going to be a huge, HUGE problem, both for Amazon and for the Sellers themselves. The difficulty of keeping up with the sales tax rates of 50 states, applying for and maintaining a sales tax license in each state, collecting, recording, reporting and then paying the collected taxes would be a huge burden. I imagine a lot of Sellers would just quit (like me). I do not see how Amazon can afford to not step in and take over the collection and reporting of sales taxes. They already have the system in place to do so. Losing a big chunk of seller delivered goods and FBA products would be a huge hit on their bottom line. The revenue they get from these sales is almost pure profit for them.
Most states require sales tax returns to be filed quarterly. An independent nationwide seller trying to comply would have to file more than 180 sales tax returns annually — an absurd paperwork burden for a sole proprietor.
Surely Bitcoin can fix this! /sarc
A couple of options, first for amazon vendors they could offer to collect the tax for the vendors (they after all have all the software to do this) Second if you search for sales tax software you find several companies that will calculate the tax and if you remit the tax to them will pay the states. Yes it wlll increase the costs for the vendors but software makes this not impossible. Of course the next area to attack is the more professional Ebay sellers you also typically don’t pay tax. Likewise Walmart could do it for their vendors (they have a large number also) as also Best Buy and likley Target.
Amazon could quit treating the sellers like sharecroppers. Put on their big boy pants as it were.
I miss Sears and Sawbucks as it was. ‘On a spectrum of Hotpoint to Kenmore, what would you like?’
The setup of merchants selling their own goods through the Amazon platform sounds very similar to a consignment shop scenario. In that case, people drop off the goods they want to sell at the store and the store sells them, takes a cut of the proceeds, and collects the sales tax. Amazon should have to do the same, especially as it’s a valid argument that they managed to get where they are today through not collecting taxes at all and undercutting the competition.
It’s payback time.
Yea Amazon could do the work, send all their vendors tax forms …
It would not surprise me that the sales tax owed to some states is a minute fraction of the cost of mailing a payment, never mind the time needed to separate, allocate and distribute the pennies.
Why can’t they collect sales tax either where the company is located or at the point of distribution? Why is tax based on the buyer’s location, not the seller’s? I know that with a giant like Amazon it can be difficult to determine their location but some protocol could be determined.
I was listening to Wait Wait Don’t Tell Me on NPR once. The audience clapped when they heard Bezos was buying Whole Foods. Clapped. They pronounced it a genius move.
People and politicians have no idea what they’re doing.
NPR is a fully paid subsidiary of the corporate establishment. Expect them always to support corporate monopolies. In fact, NPR is a monopoly, unaccountable to the people. Bring back real public radio! Let the people speak!
Real public radio still exists. You’ll find it in local community radio stations, some of which are on the LPFM part of the broadcast spectrum.
Here in Tucson, we have community radio station KXCI at 91.3 FM. (I’m listening right now.) The LPFM is representin’ on KTDT, aka Downtown Radio, at 99.1 FM. Both stations also do live streaming.
There was a lovely one out of Rockport, Me. in the 90s. I was up there in the summer. ‘Puttin’ a little more wattage in your cottage.’
Thank you!!!
And you are soooo riiiiigggght!
Years ago, when Amazon first appeared on the horizon in Seattle, a transplanted Californian female bragged about how easy it is to buy books from them, and I asked her if she had given up on independent booksellers and she replied that she loved them and browsing them.
To which I replied, “Well, wait a few years and there won’t be any around anymore.”
Now NPR made a big deal several years back about all the new independent booksellers around, but they have all but vanished given the real numeric data: Amazon has put over 3,000 booksellers out of business and over 2,000 record stores out of business.
And they will do the same with food and pharmacies until there is only one retail corporation, and the banks have only one bank and one financial exchange and one clearinghouse.
And of course, they hope to one day control that one world gov’t.
Not a pretty picture . . .
First: I am not a fan of sales taxes – they are just another unequal flat tax. But since they exist, why should I be able to go online and get a product from a company located in a state with no sales tax, thereby undercutting one of my local merchants who does have to pay sales tax? How is that helpful to my state’s small business economy? Isn’t that a move towards bigger and bigger monopolistic type corporations – like Amazon?
It is not difficult to determine the buyer’s location – after all most sales are handled by credit cards and those credit cards come with addresses and zip codes…..
Why not charge sales tax based on state of sale?
They would just set up nominal headquarters in a state without sales tax. Or Ireland, for that matter.
To get all “big picture”—arguing about Amazon and sales tax is like arguing about the up toilet seat on the “income inequality Titanic”
The real argument should be—-why are states so dependent on non-federal income tax deductible, regressive sales taxes versus a progressive state income tax?
the answer is obvious, but never talked about. and frankly the bottom 95% of voters don’t seem to care as every election is seeminly getting more and more about identity politics than bread & butter economic issues.
you make a good point here, I recall many years ago washington state had a much different car tab fee structure where the tab was based on the car value, so if you had a rv, 2 suv’s a truck to haul your boat with and your mercedes for work of course your car tab fee was in the thousands, while tegnost with his old 56 gmc paid about $40. Along came the hero of the grifter class tim eyeman and I 695 and all the sudden the revenue stream which truly reflected consumption, ie if you’ve got all those vehicles then you can likely afford the tax, into a situation where tegnosts truck then cost almost twice what it was before while the rich persons fleet of personal vehicles has it’s tax charge “drowned in the bathtub” as it were and with the resulting lack of funds well then of course the state had to cut bus service ferry service and many other things which was just the jelly on top for the jeff bezos of the world. The policy of the state giving amazon a disruptive advantage mirrors the slavishness to boeing and to nike in our neighboring state of oregon. In the end this dynamic (corporate welfare and choosing winners) is very entrenched in the political class and so continues unabated as it has for many long years. It’s policy, and amazon wanting two cities to headquarter in is their attempt to play one off the other and disunify. Oh and washington has no income tax so bezos and gates get off scott free, while a lowly gardener has to pay 10% tax on each hour worked to comply with the b+o tax. Who knew monopolists would favor monopoly? If it’s a free market it’s because these states are giving these monopolies their markets for free.
If you paragraph your articles, they will be easier to read.
I had to look up “b+o tax”. It is the hated business and occupations tax:
https://en.wikipedia.org/wiki/Business_and_occupation_tax
Ouch. A tax on gross income. However, Wikipedia says that the tax rate is in the neighborhood of 1.5% or lower, not 10%. Is there another source for the 10% value?
I always thought it was sales tax applied to labor, I could be wrong or misattributing…there’s this
https://dor.wa.gov/find-taxes-rates/retail-sales-tax/services-subject-sales-tax
seattle sales tax…
https://www.salestaxhandbook.com/washington/rates/seattle
I have a small business in WA and can verify that B&O is a tax on gross receipts (not just labor), but is down in the 1% range. Unless you’re Boeing, in which case you’re allowed, perhaps even encouraged, to laugh hollowly while burning the tax bill.
The sales tax on services is a thing, too, but separate from B&O.
thanks
Has there ever been a progressive campaign to abolish the sales tax in a state in favor of a progressive income tax?
don’t a lot of states have both of course?
When will states and municipalities recognize that they should be united to protect their sales tax revenues from the corruption of the corporations like Amazon.
You might consider mentioning the other subsidy that the US Postal Service gives Amazon. Estimates are near $1.45 / package…
But it’s top secret, could be any amount.
Something missing in this discussion is the 1998 Internet Tax Freedom Act – authored by the bi-partisan team of Representative Christopher Cox and Senator Ron Wyden – which was ultimately stuffed into H.R. 4328, the 105th Congress Omnibus Appropriations Bill, (http://euro.ecom.cmu.edu/program/law/08-732/Tax/InternetTaxFreedomAct.pdf ) After numerous failed House and Senate Bills.
The now defunct OMB Watch had much to say about the effect of that Act and its related successor legislation The Internet Tax Moratorium (emphasis mine):
OMB Watch further qualified:
One major concern is missing from the OMB Watch piece, the fact that those who most needed Sales Tax relief, were the millions who had no computer access and could not afford computers and the related costs associated with them; those same persons who were keeping the Brick and Mortars alive. To this day, there are still millions who have no access, where will they buy their basic goods when all the brick and mortars are closed down? (And YES, I have been enraged about the actual purpose and effect of that initial 1998 bill, and its successors, for nearing two decades.)
Adding to my above comment, I’ve always found it particularly obscene that Silicon Valley, with it’s average combined (State, County, and City) obscenely high Sales Tax rate of at least 9 percent punishes those residents without computers who can least afford it, right along with the very few remaining family owned stores.
Not quite correct, if they have a phone they can do catalog shopping with 800 numbers most catalogs have them still. And typically they don’t charge sales tax either.
Lyle (sorry unable to nest my comment, as I am on Dial Up and can’t afford anything other than that), re your response:
Last I’ve experienced (a few days ago), Lyle, there are thousands, if not millions of Sales Taxed items (e.g. Tampex, auto oil for two) which are totally impractical, many times impossible, to buy via catalogue and be received when one needs them when they cannot afford to buy in bulk, lets say when a hurricane is predicted, just for one example?
I really need to run now will try to follow up later, it took me near three hours to track down the exact Congressional Bill which was passed as the 1998 Internet Tax Freedom Act and I am way behind on what I need to do today, I just couldn’t help but make my above comments.