Supporters of a federal bill to end tax-free shopping online say it would restore fairness for brick-and-mortar stores and recover billions in lost revenue to state and local governments.
But the biggest winner might be one they didn’t expect: Amazon.com.
The world’s largest Internet retailer — once seen as having the most to lose — now stands to gain from federal “e-fairness” legislation, which both simplifies tax-compliance procedures and ensures new requirements for online-only merchants.
The Marketplace Fairness Act in Congress would help states force online retailers to charge taxes on Internet purchases even if the companies have no in-state locations.
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Under current law, only e-tailers with a local physical presence can be required to collect a state’s sales tax.
Amazon, with more than 40 warehouses nationwide, already plays the role of tax collector in nine states, including California, New York, Texas and Washington. By January, Amazon will charge for the tax in seven additional states as it moves its inventory closer to customers to speed up deliveries and lower its shipping costs.
All told, those 16 states represent just over half the U.S. population.
For Amazon, “e-fairness” may now mean leveling the playing field with Internet rivals that enjoy more of a no-tax advantage.
Steve DelBianco, executive director of e-commerce trade-group NetChoice, argues that while federal legislation adds a “tiny bit of simplification” to costly compliance procedures, the real reason for Amazon’s support is that it puts the squeeze on smaller online competitors.
“Now having arrived as the big dog,” he said, “they want everyone else to bear burdens they didn’t have to deal with.”
After years of minimizing its physical footprint to avoid tax liability, Amazon reversed course in 2010 and has opened nearly 20 U.S. distribution centers since then. The company also plans nine new warehouses in California, Connecticut, New Jersey, Texas and Washington, where it soon intends to open a second Pierce County location.
“If you look at Amazon’s long-term vision to deliver products faster and more cheaply, it’s inevitable that they maintain a local presence in every state,” said Eric Best, chief executive of e-commerce marketing software firm Mercent. “They want to be as close to the shopper as possible without operating retail stores.”
Amazon vigorously opposed state efforts to make it collect sales taxes after the economy fell into recession but backed off last year amid intense public scrutiny. It began collecting sales tax in Texas last July 1, followed by Pennsylvania on Sept. 1, California on Sept. 15 and Arizona on Feb. 1.
Any major weakness in California, the most-populous state, would have dragged down Amazon’s North American sales, said analyst Scott Tilghman, of B. Riley & Co. in Boston. Instead, the company’s U.S. and Canadian sales rose 26 percent in the first quarter, on top of a 23 percent gain three months earlier.
Seattle-based Amazon, which declined to comment for this story, does not provide a state-by-state breakout of its sales.
The company also is spending less of its money on shipping as it gets closer to major population centers.
Shipping costs dropped to 4.7 percent of Amazon’s sales in the first quarter from 5.1 percent a year ago, the fourth straight quarterly decline since late 2011, when the measure hit 5.4 percent.
Tilghman said a broader distribution network enables Amazon to deliver more items locally through the U.S. Postal Service, a cheaper option than FedEx or UPS.
“Ultimately, if they can have a presence in high-density areas, they can really improve their distribution efficiency and cut down on costs,” he said. “Who knows? Amazon might add its own local delivery service.”
Tilghman, who believes most Amazon customers are too attached to the convenience of 24-hour browsability and doorstep delivery to leave the site, says its number of tax-averse shoppers “is pretty small.”
Wall Street appears to have reached consensus that Amazon, with online buying habits firmly in place, is better off moving past the tax issue to expand its distribution network. About 70 percent of analysts who cover Amazon rate it a “buy.” The stock closed Friday at a near-record $276.87.
Amazon, which prides itself on low prices and large selection, is among the best at driving repeat business, analysts say. Its $79-a-year Prime program, which includes rapid delivery and video streaming, has an estimated 10 million members. On average, they spend $1,224 annually at Amazon, compared with $505 for non-Prime customers, according to Morningstar.
Another program, Subscribe and Save, gives discounts on household products if customers sign up for automatic monthly delivery.
“At the end of the day, they have so many hooks in customers,” said Fiona Dias, chief strategy officer at ShopRunner, a members-only shopping service.
“Now, all of a sudden, you have to pay 5 percent more for your Amazon order because of sales tax. Is that so bad?” she said. “And where can you run? Everyone else will have to collect sales tax.”
The Marketplace Fairness Act, which passed the Senate by a 69-27 vote May 6, faces a tough, months-long battle in the Republican-led House.
House Judiciary Committee Chairman Bob Goodlatte, R-Va., said last week that Republicans will work on their own version of the bill,” citing fairness concerns for “all businesses and consumers.”
San Jose, Calif.-based eBay has replaced Amazon as the main foe of closing the loophole on Internet sales taxes. Chief Executive John Donahoe, who urged eBay sellers to oppose the bill last month, argues that small businesses would be burdened by the need to collect for thousands of local tax jurisdictions nationwide.
The act authorizes states that simplify their sales-tax codes to require large online retailers to collect sales tax. (Businesses making less than $1 million a year would be exempt.)
To meet the simplification requirements, states could join the Streamlined Sales Tax Project or make other provisions, including providing free software to help with tax collection.
But NetChoice’s DelBianco, a bill opponent, says tax software covers only a small piece of compliance costs. Small businesses would need to hire computer consultants to integrate the software, train customer support and back-office staff, and handle audit questions from dozens of states, he said.
DelBianco predicts another boon for Amazon: more third-party merchants driven to the Internet giant’s online marketplace. Third-party merchants account for about 40 percent of all products sold on Amazon and an estimated 10 percent of the company’s annual revenue.
Amazon makes its money by charging a commission of up to 15 percent of the merchant’s sale price, but also handles tax collection for a small fee — an add-on service likely to gain appeal if “e-fairness” passes.
“After this legislation, fewer stores will put up their own websites,” Del Bianco said. “Instead, they’ll rely on platforms like Amazon’s.”
A University of Tennessee study estimates that states lost out on more than $11 billion in online sales-tax revenue last year.
Washington state would bring in an additional $184 million for the 2013-15 budget and more than $567 million in 2015-17 under the legislation, according to the state Department of Revenue. Cities and counties would receive more than $278 million by 2015-17, the state predicts.
With state and local finances in disrepair, and e-commerce growing faster than bricks-and-mortar, pressure to close the loophole remains strong, said Joe Rinzel, a lobbyist for the Retail Industry Leaders Association.
His trade group will try to offset anti-tax sentiment in the House by arguing that “e-fairness” is not a tax increase. Online shoppers already are supposed to report their Internet purchases on state tax forms and pay a “use” tax, but few do.
Bill proponents also have a powerful ally in Amazon. The company spent $2.5 million last year and about $850,000 earlier this year to lobby the federal government on taxes and other policy matters, according to disclosure site OpenSecrets.org.
While Amazon’s best-case scenario would be to expand to more states and not collect taxes, those days are over, said Michael Mazerov, a senior fellow with the nonpartisan Center on Budget and Policy Priorities in Washington, D.C.
The next-best scenario, Mazerov said, is for Amazon to ensure its Internet rivals must charge local sales taxes, too.
“They’re on the other side of the level-playing-field issue now,” he said.
Seattle Times news researcher
Gene Balk and political reporter
Jim Brunner contributed to this story.
Amy Martinez: 206-464-2923 or firstname.lastname@example.org.