Monday, July 18, 2011

Amazon, tax bully

Here's a great article by Christopher Caldwell in the Financial Times about a move by California's Governor to sign a law requiring internet retailers to collect the state's 7.25% sales tax at the point of sale.
State and federal legislators made a big mistake when they exempted e-commerce from taxes in the 1990s. They were giddy with the rhetoric of cyberanarchism and inspired by anti-tax yahoos convinced that raising revenue is an optional part of running a government.
In California, Amazon gets a wholly unproductive 7.25-9.25% (depending on which city or country you're in) price advantage over competitors with physical stores in the state - which have to collect the sales tax even when it sells online. As Caldwell argues, it's the tax exemption, not the technology, that most distinguishes Amazon from its rivals.

Amazon, instead of taking the patriotic view and accepting that free-riding on the backs of others isn't the way to go forwards, has opted instead to thumb its nose at taxpayers and fight the changes. It is backing a referendum to oppose the changes - as the LA Times reports in an article aptly entitled Amazon takes the low road, with a strapline that reads:
"It's depressing to see Amazon slogging around in the fetid swamp of corporate cynicism, promoting a self-interested ballot measure to overturn the California law on sales tax . . .arm in arm with such previous promoters of self-interested ballot measures as Pacific Gas & Electric, Mercury Insurance and the oil industry — all paragons of the public-be-damned school.
And it noted this:
In response to the law, Amazon made two moves. It cut loose all its California associates, putting many of them out of business. Then it filed the referendum, claiming that the new law will put people out of work.

This is known as shedding crocodile tears over your own actions.
And Frank Knapp Jr., president and CEO of The South Carolina Small Business Chamber of Commerce, summed up the economic folly of Amazon's tax subsidies:
“This issue is fundamentally one of fairness to the small businesses that compete with big businesses. Amazon already has competitive advantages in this regard. The state does not need to artificially give them another one that lowers their costs," he said. "The state should not be creating an uneven playing field when it comes to use tax or sales tax collection.”
Amazon has form as a tax bully - it reacted to California's effort to tax it by severing ties with its thousands of California-based “affiliates”; it has also moved to close facilities in Arkansas, Connecticut, Illinois and Texas when plans to tax e-commerce were debated. According to one politician Amazon is effectively at war with local communities:
Assemblywoman Nancy Skinner, one of the sponsors of the tax bill, accused Amazon of declaring war “on the community shop owners who support our little leagues, scout troops and local economy”.
Indeed. For further arguments, see also ITEP's blog entitled States Should Not Allow to Bully Them into Forgoing Sales Tax Reform. Caldwell ends with a warning note:
"One can look at the collapse of Borders, not to mention independent booksellers, and ask whether government policy has undermined the bricks-and-mortar retail economy to protect a will-o’-the-wisp."
Will-o'-the-wisp: a metaphor for the individuals and corporations who roam the offshore world. From Wikipedia (our emphasis added):
"sometimes seen at night or twilight over bogs, swamps, and marshes. It resembles a flickering lamp and is sometimes said to recede if approached. Much traditional, non-scientific belief surrounds the phenomenon.. . . often a malicious character. . . As the traveler follows the púca through the marsh or bog, the fire is extinguished, leaving the man lost (etc etc etc)."
As an aside: California's idea of taxing at point of sale has recently been adopted by the UK government, in a different but somewhat similar struggle.


Blogger El Senor Frate said...


Your summary is 100% false and incorrect. Amazon is NOT a tax bully, it's the states that have this 100% incorrect.

Amazon is domiciled in one of the ~50 states in the United States. Can you state which one?

Just like every other business, if they take an order from a customer in another state, they do NOT need to collect the taxes of the local state.

So if a customer in New York state, calls a flower shop in Florida, and orders something to be delivered to Virginia, the flower shop does NOT have to collect New York taxes. It does however have to bill Florida taxes, because of where it has a physical presence. You could argue that even though the purchase was made on the telephone, the point of sale is Florida (even though the buyer is in New York, and their credit card is probably registered in Delaware, etc).

What this law in effect does is it says out-of-state vendors have to keep track of where their customers are coming from, and even though the flower shop (amazon) is in Florida, they have to collect California tax because the customer is in California.

But wait you say, Amazon doesn't have a physical presence in California, it's not doing anything wrong, it shouldn't have it's revenue attributed to California.

Wrong, California says if you have an affiliate that did the marketing for you in California, and drove the traffic to you amazon in Washington state, then they (california) gets to collect a pound of flesh.

The reason this is wrong is because it actually HURTS the affiliates in California.

The second reason this is wrong is because show me a physical storefront in California that can compete with the online database and supply chain management of Amazon. Amazon doesn't benefit by being tax advantageous, it benefits by having a better (only) supply chain management. This is pure innovation, it's not tax arbitrage.

So in conclusion, the california state legislation, after being lobbied by local antiquated retailers (who have to face the music that they need to compete online if they want customers), have let politics instead of reason rule the day.

TJN should reverse it's position on this issue!

12:26 pm  
Blogger Nicholas Shaxson said...

I'm afraid that his confused and rambling comment doesn't make any sensible points. States can make laws to collect taxes on business conducted in their state. They can do this in various different ways. This is what is happening here. You state that "Amazon doesn't benefit by being tax advantageous, it benefits by having a better (only) supply chain management." Utter nonsense. you are confusing the two things. Good supply chain management is a good thing. Tax subsidies for some but not for others is a bad thing. If it were only about supply chain management, then you woudl presumably support taking away the tax subsidy (ie them paying the taxes like everyone else) and it wouldn't harm them. Your argument it thorougfhly confused.

2:32 am  
Blogger Nicholas Shaxson said...

Your comment is rambling and confused. States can tax business that happens in their state as they wish. That is what's happened here. Also you state that "Amazon doesn't benefit by being tax advantageous, it benefits by having a better (only) supply chain management." Well, if that's all it is, then you would be quite happy for the tax subsidy to be taken away so that they pay their taxes like everyone else, wouldn't you? Because it wouldn't make an iota of difference. You must now explain why they should get a subsidy that isn't available to others. Go on . . .

2:34 am  
Blogger Fred said...

What Frate is saying (I think), is that Amazon is beating the local retailers not because a book costs $10 at amazon and $10+tax at the local book shop, but more that Amazon has more books, more authors, and fast and reliable customer service etc.

Also, Nicholas, you skipped the most crucial part of this debate. When a customer makes a purchase online, in what State is that business being conducted?

If the servers are in Washington State, and the customer service reps are in Washington state, is the business really being conducted in California just because the customer is in California?

If the answer to the above question is 'yes', then you have to wonder, when a customer picks up the phone and calls inter-state and makes the same purchase on the phone, why is it that the Washington State company doesn't have to charge California tax (ie. that only local Washington taxes are charged?).

The point about affiliates being squeezed is also rather astute and relevant. There are 1 million affiliates that work for amazon and ebay. That's a lot of people scattered across the country doing online marketing initiatives. When local taxes like this are applied to online transactions that occur in other states, it actually ends up hurting the local affiliates in that State.

8:02 am  
Blogger El Senor Frate said...

The statement may be confused and rambling but it makes a simple point.

If a California resident travels to London and buys a computer, should the shop keeper tax him VAT? Or should the shop keeper say - hang on mate, where are you from? Oh California? Oh well I'm now liable to the state of California if I don't charge you California state tax.

You would say - that's ridiculous, no commerce occurred in California, so why should California bill any tax?

Likewise, if a California customer visits a Seattle website and buys something with a Delaware issued credit card, where did the commerce occur?

Most historical tax judgements have said that the transaction occurred where the servers are located, or where the entity serviced the customer - in the case of Amazon, it's typically in Seattle Washington, not the State of California....

9:55 am  
Blogger TJN said...

These sorts of questions always arise in inter-state, as in international, taxation. And the truth is that nations, and states, take steps to defend their tax bases. And they enact legislation that they deem appropriate. And they seek to have a level playing field for businesses. That is what is happening here.

And the argument you both make about supply chains is entirely, utterly fallacious and is an example of confused and woolly thinking. Whether or not a company has better supply chain management, internal efficiencies and so on, is one thing. No problem. Whether these companies (which may or may not happen to have better supply chain management) should get a tax subsidy, which their competitors don't enjoy, is quite another thing entirely. (And the answer is that they shouldn't.)

If there is a level playing field, then the more efficient company wins, or the competitors sharpen up and consumers win. But if one competitor gets a tax subsidy while another doesn't, then markets are distorted and made less efficient, and taxpayers are on the hook.

It's very clear and simple.

4:02 am  
Blogger Disastronaut said...

You wrote:

"If a California resident travels to London and buys a computer, should the shop keeper tax him VAT?"

That answer [from London] is unlikely as there is a VAT refund scheme in place for tourists. And likely indicating your lack of understanding of this entire matter - The shop keeper would only be collecting the VAT on behalf of HM Revenue and Customs, so that point is irrelevant.

However, on return to The US, the buyer, might be liable to US taxes and duty - as they are from US to UK sellers on certain items.

What doesn't happen in London is the computer maker saying they'll cut off all sellers in the UK because of the tax position of the government, like Amazon is doing.

3:21 pm  
Anonymous Brittany said...

Such a great article which they take an order from a customer in another state, they do NOT need to collect the taxes of the local state.In which
is is wrong is because show me a physical storefront in California that can compete with the online database and supply chain management of Amazon.Thanks for sharing this article.

11:44 pm  

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