Amazon's Sales Tax Move Changed Everything ... and Nothing

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BRITAIN-US-RETAIL-COMPANY-AMAZON
Andrew Yates/AFP/Getty Images
So by now you've probably heard: Amazon.com (AMZN) is collecting sales tax.

For years, pundits have predicted that the rank unfairness of online retailers like Amazon being able to sell products cheaper than brick-and-mortar retailers -- simply because Amazon doesn't collect sales tax -- would have to end. For nearly as many years, other pundits (yours truly included) have predicted that when Amazon began collecting tax, its sales would suffer.

Now, a new research paper has emerged from Ohio State University. Its conclusion: The pundits were right -- and also wrong.

Where We Got It Right

More states are striking bargains with the e-tailer to force it to collect taxes on sales of merchandise shipped to customers in their states.

At last count, Amazon was collecting such taxes on sales in 20 of these 50 states. Florida is set to become No. 21 on May 1. This is bad news for Amazon. Ohio State's study surveyed 245,000 Amazon shoppers drawn from states charging as little as 4.5 percent sales tax (Virginia) to as much as 8.2 percent (California) and examined their shopping patterns over 18 months.

It concluded that for transactions greater than $100 in value, Amazon's direct sales to consumers in a state fall by about 10 percent after Amazon begins collecting sales in that state. The bigger the transaction, the more serious the hit Amazon takes.

For purchases of items costing $300 and up, instituting an "Amazon tax" results in a sales decline of 24 percent. The decline across all shopping carts, big and small, was 2.8 percent.

Where There's a Will, There's a Way to Avoid Taxes

And yet, despite these reported declines, Amazon.com grew its sales by 20 percent last quarter. How?

The answer basically boils down to one word: "Marketplace" -- Amazon.com's program that permits third-party sellers to advertise their wares on its website -- and even to outsource the software work, the warehousing, the credit card billing and delivery of the goods to Amazon.

The Marketplace simplifies the seller's life and guarantees Amazon a tidy revenue stream of fees. According to Amazon, about 30 percent of sales on its site now come from third parties selling goods on its Marketplace.

One thing that Amazon does not do for its third-party sellers, though, is force them to charge sales taxes. As a result, even in states where Amazon technically "collects sales tax," about 30 percent of the time, purchases made via Amazon do not involve the collection of sales tax at all.

Voila! No Taxes!

It doesn't take a psychic to guess what happened once shoppers discovered this workaround to the newly instituted "Amazon tax." Rather than buy directly from Amazon.com, they began to simply buy on Amazon.com -- from third-party merchants, "the vast majority" of which, say the study's authors, do not collect sales tax.

Ohio State's study shows a 61 percent increase in sales of big-ticket items via such third-party merchants selling on Amazon -- a sales increase that dwarfs the decline in sales directly from Amazon.com.

Non-Amazon e-tailers also benefited from the Amazon tax, by the way. Amazon's competitors enjoyed a 19.8 percent increase in sales post-Amazon tax. Presumably, these were primarily competitors who did not collect sales tax -- a theory that would explain why brick-and-mortar retailers, who charge the same sales taxes that Amazon began charging, enjoyed only a 2 percent increase in sales from the newly leveled playing field.

Which kind of defeats the purpose of these brick-and-mortar retailers lobbying to make Amazon collect sales tax in the first place.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com.



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8 Comments

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zorcof

I'll just look for what I want online from other online retailers that don't charge sales tax and not thru amazon. Enough with the taxes.

April 29 2014 at 11:00 AM Report abuse +5 rate up rate down Reply
1 reply to zorcof's comment
progressivehoax

Same here.

April 29 2014 at 11:13 AM Report abuse +4 rate up rate down Reply
tarracing

I was a big fan of Amazon..........but now that they have added all of these 3rd party sellers two things have happened..........Prices are up and service is down.........takes forever now to get everything on the order that sometimes is now split between 3 vendors unlike in the past when Amazon normally could ship out of one warehouse.......... I will not use the service anymore.............. Just the hassle of chasing down where is this last Item is not worth it.........Bye Bye Amazon!

April 29 2014 at 10:50 AM Report abuse rate up rate down Reply
alfrankenfool

I buy online just to screw the state out of sales and use taxes.

April 29 2014 at 10:40 AM Report abuse +3 rate up rate down Reply
toosmart4u

I buy on line for I want to buy American. Now when all the sales tax states goes into effect I will still buy on line for the brick and mortar stores have nothing but foreign goods for sale and when the tax goes into place in all the states the brick and mortar stores will raise their prices anyway.

April 29 2014 at 9:48 AM Report abuse -4 rate up rate down Reply
2 replies to toosmart4u's comment
alfrankenfool

Good luck with that.

April 29 2014 at 10:40 AM Report abuse +2 rate up rate down Reply
gildersleeve9

I agree. Screw these overspending welfare states.

April 30 2014 at 7:45 PM Report abuse rate up rate down Reply
njenel

FLORIDA, besides speed traps, Florida now has TOLL TRAPS, BEWARE !

April 29 2014 at 9:00 AM Report abuse +4 rate up rate down Reply