The Success of Amazon: Welfare As We Should Know It
Last week, the business press reported Amazon.com had record third-quarter profits as its stock price approached dot.com bubble peaks. We should all be joining in the celebration of Amazon’s success because, as taxpayers, we deserve most of the credit.
The business press has written numerous stories explaining how Jeff Bezos, Amazon’s founder and CEO, is a truly brilliant businessman. This may well be true, but the secret of his success is not in the futuristic world of the Internet, rather it’s in the old-fashioned world of tax avoidance. The key to Amazon’s profits is its customers do not have to pay sales taxes on their purchases. In effect, Amazon has been allowed to set itself up as a virtual tax-free shopping zone.
The point here is simple: if someone goes to their neighborhood book store, clothes store, toy store, or even Wal-Mart (Amazon sells just about everything these days), they generally have to pay sales tax on whatever they buy. In some states, the sales tax can be higher than 8 percent, costing a family $16 or more on a $200 purchase
But not at Amazon: operating in the 21st century Internet, Amazon shoppers can purchase their products without paying state sales tax (unless you are unlucky enough to live in one of the four states where Amazon has a physical presence). As a result of a loophole in the law, Amazon is not required to collect sales tax on its sales. Amazon effectively splits this tax bonanza with its customers, giving them an incentive to keep coming back.
To see how important the tax subsidy is, Amazon earned just under $400 million in profits last year, which is approximately equal to 3 percent of its $13 billion in sales. If we assume an average state sales tax of 4 percent on purchases, Amazon’s tax subsidy exceeded Amazon’s profits.
While Amazon and its customers can both be happy about this situation, this is not a classic win-win story. The sales diverted to Amazon and other Internet retailers came at the expense of old-fashioned brick and mortar retailers who haven’t mastered the 21st century skill of tax avoidance. These old-timers are losing business and profits because of Amazon’s tax subsidy.
State and local governments are also losing tax revenue. This means these governments must either cut back services provided to their residents or they must raise other taxes. Of course buying goods over the Internet does not reduce the demand for services from state and local governments. So, when politicians promise not to tax the Internet they are in effect promising to have higher taxes on items other than Internet purchases.
The fact that so many politicians are so anxious to pledge to raise taxes on non-Internet purchases probably reflects the fact Internet shoppers tend to be relatively more affluent and, therefore, more likely to contribute money to political campaigns than people who don’t shop on the Internet. Candidates are always happy to help such people with a few bucks off their Internet purchases, even if it means the people who shop at Wal-Mart pay more.
Amazon and other Internet retailers also feature prominently in this story. They have not been shy about using their political power to ensure their tax subsidy remains in place as long as possible.
At the moment, there is little political momentum to take away Amazon’s tax subsidy. The businesses that suffer from the subsidized competition are either too disorganized to do much, or have more pressing problems to deal with, such as paying for health care for their workers. The general public has been kept largely uninformed on the issue because the news media generally opt not to report on subsidies to major businesses and relatively affluent customers.
So, if you can get to the web to do your shopping, you should appreciate the fact you don’t have to pay sales tax like Wal-Mart shoppers. And, you should take pride your tax subsidies have allowed Amazon to be a major international retailer. Jeff Bezos couldn’t have done it without us.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( www.conservativenannystate.org). He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues. You can find it at the American Prospect’s web site.
Check out the math at Amazon — like many other on-line retailers, they get your attention with a low price and tax-free sticker, and then really put it to you with the handling/shipping costs, which are as wondrous as credit card interest rates. Whenever I cross-check the real costs of buying Amazon, vs either another on-line source or going down to the store, I am again impressed with the success of their dodge on a math-challenged populace.
I just can’t let anyone diss Amazon till they have lived in small town America where the invention of Amazon meant ACCESS to real books by people like Naomi Klein or anything else not on the official Best Sellers list.
LOCKED IN TAXES VERSUS INTERNET TAXES
In contrast to the Bush income tax cuts, for sales taxes, it’s far easier for a politician not to tax something going forward than to remove an existing tax.
The point of least resistance keeps Amazon tax-free and shoves the burden to brick-and-mortar. Further, Amazon itself is little more than thousands of brick-and-mortars.
Even when the shipping and handling charges are more than offset by the absence of taxes, it’s questionable how clear are the political coalitions for and against taxing internet sales. It’s more likely a few key players like Amazon against state government players.
One interesting question is what a “fair consumption tax” would do in this area. The general idea is to stop taxing income and tax consumption instead, in an effort to root out all the corruption with a massive overhaul.
One criticism is a consumption tax would be regressive, but most internet items would tend to fail a “needs” test and not contribute to the problem if Baker is right about internet consumption dominated by upper income customers.
But since a sales tax is regressive (i.e. it weighs most heavily on those with limited incomes), shouldn’t we applaud its avoidance? And in reducing revenues from sales taxes, do we not encourage state and local governments to place more emphasis on progressive income taxes?
The tax revenue argument against internet commerce amounts to small-minded whining. Far more significant is the negative impact that web shopping has on local businesses, and frankly, I see no easy solution.
There missing some information here. One of Amazon’s main warehouses is in New Castle, Delaware (Home of Tax Free Shopping). Yes no sales taxes but the State does asses a “Gross Receipts Tax” from retailers and Amazon as well, plus local taxes. The taxes for items purchased are in the cost, but still cheaper than sales taxes. There are County and municipal taxes they pay as well. Again I am not saying Amazon is not paying there share of taxes, but they are paying some taxes.
lizful,
Every purchase over $25 from Amazon (not from its marketplace or business partners) is eligible for free shipping. Amazon decided to forgo television advertising and used the money saved to offer free shipping. Amazon may have many faults but scamming customers with shipping charges is not one of them.
What a pathetic article. Don’t they realize that Amazon gives free shipping if you spend $25? I have spent THOUSANDS of dollars at Amazon.com each year. I purchase whatever possible there to avoid paying taxes. It is sooo easy to get free shipping at Amazon. This is one way to fight back at the government and avoid paying taxes.
It’s a great era if you are a reader of books. what you can’t find on the internet, and it is a trial to read on a computer screen, you can often purchase at amazon for a penny.
on a somewhat off topic note, when naomi klien’s book gets to that price at amazon I will purchase it, until then I will rely on word of mouth and you tube clips. I hope that this revolution will not come with a huge price tag! or charge us admission!
the eminent black historian john henrik clarke, while giving due credit to a few of his teachers, said that his true classrooms were the public libraries and a few good second-hand bookstores. the former have fallen victim to relentless budget cutting, reduced hours etc., and the latter are all but extinct. amazon and b&n are what’s left, and they’re the intellectual equivalent of quickieburger cuisine. coincidence?
Then again…
A good friend of mine owns a small ‘alternative’ bookshop. But his business is slowly ‘going down the proverbial’ ~ due, he tells me, mainly to the affect / impact Amazon is having on his sales…
Small independent shops are really worthwhile, -a shame if they go under, due to ‘the Big Boys’ like Amazon?
UN-common-dreams
a shame if they go under, due to ‘the Big Boys’ like Amazon?
true.
perhaps as consolation, everything else is going down and everyone’s beginning to work for free, as gillian welch laments.
I know they got it figured out where people will do what I do for nothing, or next to nothing. there’s no way to compete with that.
I wish this article had called for a change in the sales tax laws. Why shouldn’t we pay sales tax at Amazon? A sales tax supports local economies, yes, but why should any business be allowed to flourish without being covered by sales tax?
I’d like to read an article that explains why only four states assess Amazon taxes. Is it because the commerce clause in the constitution only allows sales tax based on locality? This could be changed, perhaps with a federal sales tax that would then be funneled to the domicile. So is small town person in rural Idaho wants to buy Naomi Klein, she still pays a sales tax and it would go to rural Idaho. We could do it if we had the will.
Heads up to those of you who extolled the so-called free shipping at Amazon. There is no such thing as free anything from corporate America. You pay for the shipping, you just don’t get itemized for it.
Somewhere, sometime, we’re all going to have to pay the piper. If everyone shopped online and stopped paying sales taxes, your local communities would rapidly detriorate. So you are paying for diminished quality of life with your so-called free shipping, inter alia.
I had a lengthy reply all writtin but as I see it:
I’ll just say ,I’ve been involved in small town politics enough to learn that “diminished quality of life” unless of course your referring to”there lives” is not there concern.
If you hadn’t noticed : All tax cuts that are non-local ,become local tax increases.
The Moral to this story is: As long as we continue to pay ANY TAX the criminals will glady continue living high off those taxes, while pretending to represent those who have paid.
From small town America to Wall Street …..I mean DC,there all the same.
The key to Amazon’s profits is its customers do not have to pay sales taxes on their purchases. In effect, Amazon has been allowed to set itself up as a virtual tax-free shopping zone.
–We have forgotten that a long time before the Internet was even a factor that interstate commerce, via mail order companies, was sales tax free. In addition, let us not forget to buy anything over the Internet, we have to pay shipping charges, which most of the time exceed the sales tax. Now, if mom and pop stores cannot sell these items at equal cost (including the shipping charge one has to pay), then no wonder they go out of business. Moreover, some states require the buyer to pay sales tax anyway! I live in such a state. Leave Amazon alone, they are not the biggest corporate leech. If you force them to start collecting taxes, you might as well just close them down. On the other hand, if there’s a surtax supporting s-chip, I’ll gladly pay it.
One other key to Amazon’s “success”: Their workforce is made up of temp workers.
This is very true, Rob, especially for those who work in the IT field. Contract work–no benefits or job security–even for those workers who are highly qualified. The genius of our profession is that we’ve made it so easy for them to outsource!
Unfortunately, I have met the type who drift through life thinking they should never have to pay taxes at all, especially the insult of local or state taxes. When you ask them about such mundane necessities as garbage pick-up. fire and police departments, road repair, gas line, waste and water pipe maintenance, they will hilariously tell you that they want it all privatized and are willing to pay for that out of their $70,000 per annum middle-class salary, if they should need it, and in amounts they they determine. They just don’t want to be taxed for it, and God forbid if they are taxed to help anyone else. Did I mention these people do a lot of shopping online and many still vote Republican?
Of course, should their house burn down or their basement flood from a broken pipe, they will be at the head of the line demanding to know why the local government didn’t take steps to prevent it. They may want the government drowned in the bathtub, but not the one in their own flooded bathroom.