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Behold: How Amazon wins the sales tax wars even when it loses

FORTUNE - Amazon CoverTaxes aren’t a sexy story. And the story of Amazon’s(s AMZN) long war against collecting sales tax tends to be reported in dribs and drabs, with coverage generally focusing on battles in individual states, which can make it even more boring to keep up with the issue (or maybe that’s just me). Peter Elkind’s cover story in this week’s issue of Fortune magazine, however, focuses on the entire saga.

Maneuvering to get around taxes isn’t unique to Amazon — note Apple’s own practice of keeping billions of dollars of profits offshore. The Fortune story makes it clear, though, that Amazon’s greatest advantage in the fight over collecting sales taxes has been its ability to adapt quickly to changes in the law — even if it’s simultaneously fighting those changes aggressively. When things don’t go its way, Elkind notes, “Amazon has shrewdly and successfully maneuvered to turn each development, good or bad, to its own advantage.” Part of this strategy simply means “going to extreme lengths — demanding, wheedling, suing, threatening, and negotiating — to avoid collecting for as long as possible, in as many states as possible.”

When Amazon is forced into collecting sales tax, though, it has been able to turn that into an advantage by “maneuvering to combine its needs (more warehouses) with its wants (preserving tax-free shopping for as long as possible).”

For instance, forced into collecting sales tax in South Carolina in 2010, Amazon “offered a compromise: It would start capturing sales tax in January 2016—almost five years later.” The South Carolina House rejected the compromise, and Amazon said it would leave the state and its “half-built warehouse.” Paul Misener, Amazon’s VP of global public policy, stated at a press conference, “The 1,200 jobs and nearly $100 million in capital investment that were coming to the state — aren’t.”

The House changed its mind three weeks later and Amazon will not collect sales tax in South Carolina until 2016. More recently, the retailer enacted a similar strategy in Texas, but there it was also able to secure a write-off of its own state tax bill. In addition, it will benefit from a “rebate” on the sales taxes collected in the suburbs where its warehouses are located. “This bonanza,” Elkind notes, “would run well into the millions.”

By 2016, Amazon (s AMZN) will actually be collecting taxes from 17 states, representing about half the U.S. population, and it’s agreed to collect sales taxes in every state where it has a warehouse. And the Marketplace Fairness Act, which would force large online merchants to collect sales tax on behalf of other states, recently passed the Senate. Amazon, which has long said it supports a federal solution for online taxes, supports the Marketplace Fairness Act.

Amazon also argues that its insistence on a federal solution is a matter of principle. Misener testified in Congress last year that “far from an e-commerce loophole, the constitutional limitation on states’ authority to collect sales tax is at the core of our nation’s founding principles.” He told Fortune, “We feel very good about our position because it’s a constitutional right.”

The full Fortune article is only available online to paying subscribers, meaning you may have to pick up a print copy. It’s well worth a read over the long weekend.

6 Responses to “Behold: How Amazon wins the sales tax wars even when it loses”

  1. Vigilarus

    SC should’ve told Amazon to shut up, pay up, and take a hike if they refuse to compete on a
    level playing field of taxable status. Then they could seize the uncompleted warehouse as partial compensation for past tax evasion and offered it to a business that is willing to play by the rules.

  2. Androidian

    This is a mistake on several levels.

    First off, tax receiving states have zero overhead supporting non-brick and mortar stores. They need provide no services of any kind in exchange for the tax they collect like they must for retailers with physical presence. So if fairness is supposed to be at play then there should be some reduced sales tax rate for sales by parties collecting this windfall for the states.

    Second, even exempted companies may choose to fold simply because to be exempt, they must be made visible and the threat of potential bureaucratic intervention plus the states will all be free to make whatever legislative mandates upon the sellers they choose. Also for those exempted below 1 mil gross sales, many have extremely small profit margins and may be struggling to grow past the 1 mil gross sales point which will now be very much a disincentive, beyond the the bureaucratic monitoring and meddling.

    Third, online retailers who are close to the exemption threshold will likely quit selling simply because of the incentives. Many who say “Who cares?, They don’t represent much in the overall revenue stream anyway.” miss the realization that it is the fledgling companies that are the seeds of the mid-sized companies and later the larger companies. Cutting off the seedling companies radically alters the chances of further growth occurring and that is a situation no economy needs long term.

    Fourth, even if software exists for calculating owed collected taxes, there is no convenient (or free) software to make the 46 to 3600 individual check and associated supporting paperwork. The solution to this would be to have ebay and other sales processing service companies make this all transparent for the sellers but no one is even suggesting this currently.

    I, for one, will be closing my fledgling business for sales in the US.

  3. Memorial Day Distasteful Cover Page

    First and foremost, what’s most distasteful is that Elkind decides the Magazine Cover and Title to the print edition which will be released around Memorial Day should use the term “war” and portray Amazon as a company whose delivery boxes are munitions crates and also display currency as bullets. Memorial Day, a day where this country celebrates but also mourn the millions of soldiers that have sacrificed life and limb for the freedoms that allow people like Elkind to write these one-sided recycled articles. Great timing and fantastic idea to compare a company’s history regarding tax policy as worthy of comparison with War as families, communities, neighbors mourn their loved ones. +1… NOT.

    Maybe it would have been more appropriate if you’re going to recycle a story about Amazon around Memorial Day that you re-run that one your colleague, Adam Lashinsky wrote last year about Amazon and its commitment to hiring military veteran which is uplifting and more reflective of the ethos and leadership principles of the company rather than whining about why certain deals were negotiated to compensate for the fact that the overwhelming majority of customers don’t remit use taxes they owe on most online purchases. (A fortune article actually worth reading).

  4. Giant Amazon will get sweetheart tax breaks……….smaller online merchants won’t…….this is just the same as banks writing financial reform laws, big pharma writing healthcare legislation……even the name is laughable “Marketplace Fairness Act” give us a break already……remember “Clean Air Act” “No Child Left Behind”, etc……………

  5. SixSixSix

    Oh great, Amazon invoked the Constitution to advocate non-States Right to collect State taxes. Is there no shame? No of course not. If it works for the NRA, and everyone else can abuse whatever they want.