How Amazon Built its Empire on One Tax Loophole

Written by Alan Pyke has reshaped American commerce in just two decades. But how much of the online shopping empire’s success owes to innovation and entrepreneurial genius, and how much of it stems from cheating the system?

Without the loopholes it uses to avoid state sales taxes, new research shows, Amazon loses a substantial portion of its customers’ spending to alternative retailers. In five states that closed the sales tax loopholes that make Amazon’s prices more competitive than what in-state retailers can charge, the site’s sales fell by 9.5 percent.

For large purchases where the sales tax advantage would be most pronounced, the researchers found an even steeper drop in Amazon spending. When states close their online sales tax loopholes, “consumers decrease their spending by 15.5% on purchases larger than $150, and by 23.8% on purchases equal to or larger than $300.” These findings come from a National Bureau of Economic Research (NBER) working paper which examined data on millions of shoppers from before and after the implementation of so-called “Amazon tax” laws in California, Pennsylvania, Texas, New Jersey and Virginia.

The money that stops going to Amazon mostly goes to competing online retailers, according to the NBER paper, but some of it also reverts back to the brick-and-mortar storefronts that have been getting pushed out of business by online shopping for years. Had the web giant not enjoyed these huge price advantages over the past 20 years, of course, those other online retailers that customers now turn to might not have developed. When the company launched in the mid-1990s, the alternative businesses positioned to capture all the spending that sales tax fairness displaces from Amazon today would mostly have been physical stores.

What’s bad for Amazon is also good for state governments in this case. California’s online sales tax law brought in more than a quarter-billion dollars of revenue in its first year. While another dozen states have closed the Amazon loophole, estimates of how much tax revenue state governments are losing still come in around $20 billion per year. A bill to close the loophole nationwide passed the Senate last year but has stalled in the House, even though Amazon itself supports the bill and major business groups like the Chamber of Commerce have urged Congress to pass it.

As Amazon’s about-face on that bill suggests, changing the tax system isn’t going to drive the company out of business at this point. Its model, which relies on outsourcing its physical warehouse labor to ruthless logistics firms that treat workers poorly and provide only low-paying, temporary and grueling work, can absorb the change. But by leveling the sales tax playing field, lawmakers would not only restore some competition to the marketplace but also give a significant economic boost to the low-income families who are disproportionately affected by sales taxes.

This post originally appeared on ThinkProgress

Photo Credit: Aurelijus Valeiša via Flickr

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Janice Thompson
Janice Thompsonabout a year ago

Making mountains out of mole holes.

Gary Wells
Gary Wells1 years ago

Amazon is a business, and like any other business it intends to maximize profit, that's called capitalism and that's what made America rise head and shoulders above all other nations. Get it through your head-the desire to build a business and make money, make a living, employ people so they can, in turn, make a living is not dishonest or evil or unethical.
They have not broken any laws. And it took ALOT more effort and talent to build that business than it took you to write a sniveling, one sided, rant about how unfair their business model is.
Go make something happen; take a few knocks, fall on your face pick yourself back up and try it again until you succeed-and then come back and post.

Bruce C D.
Bruce C D.1 years ago

@Charles S.--

I'm not claiming to be an expert. Your own state comptroller would be the expert, and according to that source, you do have a use tax, and you are responsible for paying it. That is shown at the link provided in my comment. Did you even bother checking it out?

Nor did I call you ignorant. I said you were ignorant of your state's tax code. There is a huge difference between the two. One constitutes a personal insult, the other is pointing out a fact. I will go further, though, by saying that if you didn't bother clicking on the link or doing the research for yourself to discover the truth when it has been pointed out to you, that amounts to willful ignorance of your state's tax code on your part.

I provided you proof of the truth, you have provided nothing but denials of the truth.

Maria Teresa Schollhorn

Interesting. Thanks

Carole R.
Carole R.1 years ago

I think we can use any tax break we can get.

Charles S.
Charles S.1 years ago

Bruce D , I do not know what makes you an expert on Md. taxes. There is no tax designated as a use tax. We have a 6 % sales tax as I have stated before. I do not know what your problem is. Every citizen in the state of Md. pays sales tax on their purchases from venders in the state , and pays sales taxes on items purchased from companies on-line or catalogs , that have presence in Md. Every time I have ordered on line , from Best Buy , Target or other company that has a presence in Md. they add sales tax to my bill.
I fully understand my responsibilities , and follow the law.
I do not appreciate being called ignorant.

John R.
John d.1 years ago

success owes to innovation and entrepreneurial genius, and how much of it stems from cheating the system? ???

cheating the system would insinuate that Amazon is BREAKING the law. I'm not so sure that that is the case here. Does the law in each state require that Amazon collect that state's taxes? If so then those states have a problem and a LEGAL case against Amazon and they should go after them. OR DOES the state laws require the BUYERS (the people that are now following the author's logic and misdirected comments) to remit those sales taxes themselves.

Without the loopholes it uses to avoid state sales taxes, ???

What is a loophole ? IT"S LEGAL verbiage in the tax law that states that Amazon does not have to COLLECT FROM THE BUYER !

PEOPLE, Amazon nor any other company in America PAYS TAXES out of their income - those companies only collect ALL of their taxes from you the consumer !!! They cannot pay taxes, they do not have any money UNTIL you give them that money. And the poor have to spend a larger share of their earnings on those unfair taxes.

Artem V.
Artem V.1 years ago

Let's abide by the law ourselves and force all the companies to do so.

Liliana Garcia
Liliana Garcia1 years ago

Working people need tax breaks and reading is too good a habit to let it wither. Of course tax breaks should not be at the expense of other working people but drawn out of the incredible profits these mega corporations make.

Lynn C.
Lynn c.1 years ago

Interesting. Thank you.