Why Amazon Flip-Flopped on the Internet Sales Tax

Brick and mortar retailers have long complained that state and local sales taxes put them at a disadvantage against Internet-based retailers. When a resident of La Mirada California buys from a local store, they pay a 10% sales tax on their purchase. This includes sales taxes from the city of La Mirada, the county of Los Angeles, and the state of California. If they make the same purchase online from a vendor in Reno Nevada, they normally pay no sales tax.

The Internet isn’t really the key economic issue. The individual could drive to Reno and pay no sales tax. Likewise, they would have to pay the same sales tax if they ordered online from a company which was also located in La Mirada. They key economic issue is that cities, counties, and states tax sales to consumers based upon the location of the buyer instead of the location of the seller.

The key business issue is that compliance with these sales tax issues is brutally complex. In California alone, there are 1,784 different sales tax jurisdictions. If a vendor is required to collect sales taxes on Internet sales, they will have to understand the sales tax laws in every jurisdiction where a customer orders from and they will have to file sales tax reports in each of these jurisdictions.

For most Internet retailers, this is impossible. The costs of collecting local sales taxes will simply force them out of business. Amazon is one of the few Internet-based retailers with the scale necessary to deal with costs of complying with an Internet sales tax. This gives Amazon an enormous competitive advantage over smaller Internet-based retailers. However, this isn’t the real story behind the story. The real story is a bit more complicated to understand. For Amazon, an Internet sales tax represents the largest opportunity in the history of the company.

Several years ago, Amazon realized that they could only grow so large and so fast by selling goods themselves. They created a partner program which enabled other companies to sell through Amazon. The program is extremely popular and reasonably profitable for the participants — with some noticeable caveats. Amazon collects data on every purchase — and even on every product view. If any vendor is “too profitable”, Amazon detects this and goes into competition with them.

The system is devilishly brilliant. A reseller of blue widgets wants to increase sales, so they start selling on Amazon. Their sales and profits increase steadily until they hit a threshold high enough to attract Amazon’s attention. When that happens, Amazon goes direct to the manufacturer and starts selling the same blue widgets themselves. The original reseller discovers suddenly that their sales through Amazon have suddenly disappeared and they are now in a worse situation than when they started with Amazon because their new competitor has all of their sales data.

The imposition of sales taxes on Internet sales would force many Internet retailers to do business through Amazon, earning Amazon billions of dollars in new revenue. In addition, it would also give Amazon the data necessary to successfully replace a those same companies in the marketplace.

Amazon used to opposed a sales tax on Internet purchases because it limited their competitive advantages over brick and mortar competitors; they now support a sales tax on Internet purchases because it will give them an enormous competitive advantage over  their Internet-based competitors. This shows who Amazon is really afraid of.