The Marketplace Fairness Act: Why Amazon Wants to Be Taxed

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Jeff Bezos  CEO of Amazon introduces new Kindle Paper white during a press conference on September 06, 2012 in Santa Monica, California. The new Kindle Paperwhite eReader will retail for $119 USD and ships October 1. AFP PHOTO/JOE KLAMAR        (Photo credit should read JOE KLAMAR/AFP/GettyImages)
Joe Klamar, AFP / Getty Images
On Friday the Senate passed a nonbinding resolution in support of the Marketplace Fairness Act, a bipartisan bill that would empower states to tax consumers for online purchases. While the vote was symbolic, it suggests that more consumers will soon find themselves paying sales tax when they make purchases at e-commerce sites like Amazon.com.

And surprisingly, Amazon is fine with that.

Traditional retailers have long taken aim at e-commerce's tax advantage, so it's no surprise that the bill's list of supporters includes such names as Sears (SHLD), Best Buy (BBY), the Gap (GPS) and Barnes and Noble (BKS). But Amazon (AMZN), a company that spent years fighting proposals to tax online sales?

"Amazon.com has long supported a simplified nationwide approach that is evenhandedly applied and applicable to all but the smallest volume sellers," Amazon VP Paul Misener wrote in a letter supporting the bill. "With this in mind, I am writing to thank you for your bill, which will allow states with simplified rules to require sales tax collection by out-of-state sellers who choose to make sales to in-state buyers."

It may seem odd to see Amazon advocating for a law that would wipe out its tax advantage over traditional retailers, but this isn't a new development: It also supported an earlier version of the law in 2011, and Misener testified before Congress last summer to express the company's support for the bill.

We've already seen how the expiration of the payroll tax holiday softened consumer spending to start the year, and an internet sales tax would further chip away at online retail sales. So why would Amazon, the world's largest online retailer, support it?

A State-by-State Mess

To answer that question, it's important to understand how the sales tax battle has played out over the last few years.

In most states, an online retailer will only collect sales tax from customers if it has a physical location within that state. If there's a Gap store in your state, and your state has a sales tax, then anything you buy on the Gap's website is going to be taxed.

Amazon doesn't have stores, but it does have fulfillment centers, those massive warehouses where it keeps its products and ships them off to customers. If Amazon has a fulfillment center in your state, then it isn't considered an out-of-state seller, so your purchase will be subject to whatever your state charges for sales tax.

But states where Amazon doesn't have a physical presence have hit on another way to make it collect sales tax: so-called affiliate nexus laws, which say that if an "affiliate" of an online retailer has a physical presence in the state, then the retailer itself has to collect sales tax. In Amazon's case, those "affiliates" are its associates -- website owners who get a small commission every time someone buys a product on Amazon after following a link from their site. Under a nexus law, the presence of one of these associates in the state is enough to compel Amazon to pay tax as an in-state merchant.

After California passed such a law in 2011, Amazon went nuclear, cutting ties with all of its California-based associates and planning a referendum to overturn the law.

But soon thereafter, Amazon decided to strike a deal with the state: If California would wait a year before it started collecting sales tax, Amazon would drop its opposition and then build two fulfillment centers in the state, bringing in thousands of jobs.

In fact, a lot of these fights have been ending the same way as of late. In South Carolina, for instance, Amazon promised to build a distribution center that will create 2,000 jobs, and in return won't have to pay sales tax until January 2016. Similar deals have been struck in Texas, New Jersey and Tennessee.

An Evolving Amazon

Amazon's conciliatory approach is partly a matter of accepting the inevitable: The number of states that allow tax-free online purchases is dwindling, and Amazon would clearly prefer a simplified taxation regime to a series of pitched battles with state legislatures. The bill before Congress wouldn't impose a national online sales tax, but it would make it a lot easier for the remaining states to start enforcing sales tax laws by doing away with the "physical presence" requirement.

"It's a very chaotic structure right now, every state has its own rules," says Randy Frischer, a tax partner in BDO's retail practice. "The interest of uniformity is very important to them."

But its willingness to strike those deals in South Carolina and California points to another key factor: Amazon wanted to build fulfillment centers there anyway, so it made sense to give up the fight and strike the most favorable deal possible.

It's telling that Amazon got to work building fulfillment centers as soon as it came to an agreement to start collecting sales tax. The only thing stopping Amazon from building those warehouses sooner was its unwillingness to subject itself to taxes by establishing a physical presence; as soon as those taxes became an inevitability, Amazon went forward with its building plans.

That's because building more distribution centers is something Amazon "needs to do at this point," according to Frischer.

Speedy delivery is increasingly a priority for Amazon. The one- and two-day delivery provided by Amazon Prime is made easier and cheaper by having a truly national fulfillment center in place. And same-day delivery is considered the next great frontier of online retail, with Amazon, eBay and Walmart all experimenting with programs that get you your merchandise the day you order it.

Walmart has stores everywhere, which makes it possible for the retailer to get you your merchandise the same day you order it. If Amazon wants to offer the same speedy service, it too needs to have a physical presence across the country.

Competitive Advantage

Amazon, then, has little to lose from the Marketplace Fairness Act, as its evolving business model means that it was going to start collecting sales tax at some point down the road.

And from a competitive perspective, it has everything to gain.

We've come a long way since the late '90s, when Amazon was one of just a few online retailers. Back then its main competition was bricks-and-mortar retail, so avoiding sales tax gave it a big competitive advantage. Now, though, Amazon has plenty of competition in the online retail space. And if its expanding physical footprint means that it's going to get taxed anyway, it wouldn't mind seeing the competition also subjected to sales tax.

In fact, those smaller e-commerce sites that have cropped up in recent years might struggle if the Marketplace Fairness Act forces them to start collecting sales tax.

"Bigger players can bear the brunt of the taxes that might wipe out the smaller players," says Chris Christopher of IHS Global Insight. "That could actually increase their market share, in some sense."

It's not often that a company asks the government to increase its tax burden. But with one eye on the future and another on the competition, Amazon is smartly realizing that a national sales tax law could help more than it hurts.

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.

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Sam Black

Amazon's presence (nexus) will eventually stretch to all 50 states, plus territories. They figure, why not screw over their competition now rather than waiting till then?! They say "Pass MFA or MITFA" because they know they can absorb costs nearly 10x easier than most small ebiz. That being said, w/ Alibaba's IPO, I've read Amazon is changing their tune about Marketplace or efairness.
Can't beat this video on the topic: http://youtu.be/-sMaQ8V4-UQ?list=PLt5zAu2L3A-oY-pUmAmE2LoU-KxJuSILm

October 14 2014 at 4:54 PM Report abuse rate up rate down Reply
Valerie Ferguson

We are already taxed up the ying-yang...I really like shopping on amazon...I could find almost everything I was shopping for......but I guess I may as well go shopping somewhere else.

May 06 2013 at 10:04 PM Report abuse rate up rate down Reply
freemanbonus

Great. It is always nice for the big retailers to use regulation/tax to increase the burden for the smaller merchants. (/sarcasm) When big businesses and big labors (look at how many unions support this) get in bed together with the government, we can be assured that consumers and the little mom & pop merchants are gonna get hurt.

March 29 2013 at 11:30 AM Report abuse rate up rate down Reply
mgus17

One thing overlooked is the huge advantage this would give eCommerce merchants in China. They are already popping up left and right with free shipping and below retail prices. This will give China a huge opportunity in the US ecommerce market.

March 26 2013 at 10:21 PM Report abuse rate up rate down Reply
Bill Benton

I will add that, as a doctor, I deal with a major supplement company in Wisconsin, which no longer has a plant in California. For the last ten years, it has infuriated me that they still impose a sales-tax on physicians with no physical presence in Wisconsin. I would do twice the business with them that I now do, if they'd get their heads on straight and correct this critical error or theirs.

March 26 2013 at 5:47 PM Report abuse rate up rate down Reply
Bill Benton

No dice. You don't have a physical presence in the state (a "tax nexus"), and no tax is applicable. And, I don't mean a nefarious agreement between states, like the ones which impact the infomercials on TV. If the company is in Conn, and I am in Calif. no tax..no way!!

I do a lot of business with Amazon, and if this policy goes into effect, I am likely to do far less business with them.

March 26 2013 at 5:42 PM Report abuse rate up rate down Reply
scottee

just because Washington deficit spends...does not mean they don't collect enough money.

March 25 2013 at 9:36 PM Report abuse rate up rate down Reply