A Wrinkle in Amazon Could Lead to a Swiftly Tilting Tax Bill of $2.1 Billion

By Nick Slepko - May 1, 2012 | Tickers: AMZN, BBY, WMT | 0 Comments

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In “Part 3: Pushing Back on Sales Taxes – States fight back against Amazon’s tax deals” the Seattle Times has the shocking revelation that companies try to minimize their tax burdens, and prefer to operate with minimal interference. What the reporters fail to note is that trends in Arizona and Texas could lead to Amazon (NASDAQ: AMZN) owing $1.7 billion to $2.1 billion in back sales taxes assessed by other states if Amazon fails to reach settlements like they have with California, Indiana, Pennsylvania, and Tennessee. While Amazon’s most recent 10-K does mention a risk because “We Do Not Collect Sales or Consumption Taxes in Some Jurisdictions” they do not attempt to quantify it (though it may add up to more than three times their 2011 profits). In the unlikely event that the worst does come to pass, it would be interesting to see if Amazon would attempt a maneuver to recover its losses from the individual customers which ultimately owe the back sales taxes to their own states.

Amazon’s activities may spur a more aggressive approach by state revenue authorities to collect “use taxes” (essentially a sales tax on things not subject to sales tax) on individuals, not just companies (which can be audited easier). So, for those Washington State online shoppers and flea market aficionados (as well as their counterparts across the fruited plains hiding in majestic purple mountains), they should make sure to fill out the forms and remit their use taxes (a whopping 9.5% in Seattle, mercifully less elsewhere).

Amazon has tried to remedy these tax issues as part of ambitious deals like the one with South Carolina to exempt its sales from the state sales tax. But in a classic Bootleggers-and-Baptists scenario (coincidentally a phenomenon coined by Clemson University professor Bruce Yandle in 1983), Amazon was opposed by Wal-Mart (NYSE: WMT) and Best Buy (NYSE: BBY) which used “mom-and-pop” stores as fronts for their efforts to not only defeat this exemption, but disrupt Amazon’s commercial activities altogether. However, after initial defeats Amazon increased the jobs it promised to create and convinced the legislature to reverse itself. Amazon has shown itself able to repeatedly out maneuver Wal-Mart and Best Buy in these proxy wars and its political nimbleness bodes well for its ongoing tax campaign at the state and federal levels.

The Seattle Times reported one minor concession that could be the undoing of us all, “Amazon agreed to place a small notice on the bottom of its South Carolina orders, notifying customers they may be required to calculate and pay the state tax themselves.” One can only imagine the ruthless efficiency with which Amazon would carry out tax collection if properly incentivized (or even if customer information were handed over to the states). At present, in a classic Amazon move, they have found a use for their internal tax calculation and collection systems and are offering it to their third party sellers and others (for a fee of 2.9% of the tax collected – though it is not clear why fees for a $10 item would cost more than a $100 item).

While the lack of sales tax for a portion of Amazon’s customers is a selling point, it clearly is not the foundation upon which Amazon rests – especially as it diversifies. Amazon has always based its success on price, service, and convenience, while the former may be diminished an independent study cited in the Seattle Times article shows that at least 46% of the products will still cost less than the competitors.

The main concern for Amazon at the moment is having to pay hundreds of millions of dollars that states are assessing in back taxes based on the company’s “Internet presence” or on activities carried out by its third party partners. Almost half the states will have enacted some form of Internet tax in the next couple years, and as the number of states grows in which Amazon is mandated to collect sales tax it could find itself more vulnerable to demands for back taxes. The company’s Fabian strategy to delay the inevitable is predicated on a gambit involving deals that presuppose a national sales tax. The Seattle Times reports:

...some experts view Amazon's support for federal legislation as convenient, given a hyperpartisan atmosphere in Congress that may prevent any agreement on taxing Internet sales...Even if Congress does act, some business analysts say no one should expect Amazon's retail growth to be derailed.

At the state and local level, last November proved that a majority of Washington State residents were thankful for Bezos’ anti-tax stance. His support in defeating the state income tax put him in the company of 64% of the state’s population. On the other hand, California has been a bit more complicated, but like South Carolina, it gave Amazon a chance to display its political acumen.

In California, politicians attempted to present their aggressive grab for even more taxes from their citizens by portraying their state’s enemy as Amazon. Amazon initially prepared for a political fight by gearing up an anti-tax referendum and organizing their thousands of web affiliates which they were forced to disassociate from as a result of state legislative actions. Amazon then used its aggressive posture and perceived organization to convince state officials to make a deal. So, while Amazon will start collecting sales tax in September (an arrangement they knew inevitable), they also avoided having to go to court for what is estimated to be over $400 million in back taxes that California would have claimed was owed “the people”

Next: Amazon Thrawn for a Loop?
Previous: Amazon: The Next Iteration

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