Online Sales Tax: A Non-Issue
Amazon.com recently began charging sales tax on online transactions made by residents of Pennsylvania and California, which means that 33 percent of the U.S. population is paying sales tax on Amazon purchases. This figure is expected to climb to 44 percent, or 14 states total, by 2016. And at the federal level, three bills are pending that would enact a federal requirement for online sales tax collection.
However, just because online sales tax collection is a growing phenomenon among states does not mean it poses a threat to Amazon’s march toward retail dominance, and eCommerce growth generally. In fact, the competitive advantage of ecommerce has little to do with online sales tax. The reality is that according to the Amazon 2011 Annual Report, the company is already collecting sales tax on over half of their revenue, and sales growth is only accelerating.
Consumers have always been required by law to pay sales tax on anything purchased online or offline. In 1992, the Supreme Court found that only online retailers with a physical presence in the state were required to collect sales tax -- otherwise, the burden was on the consumer to report their purchases to the IRS. Several states attempted to expand that definition to include affiliates of Amazon operating within state borders, such as independent sellers utilizing the Amazon Marketplace. Therefore, Amazon cut ties with any affiliate operating in the six states that passed such legislation.
This is not to say that Amazon is opposed to collecting sales tax. Amazon has publicly supported collecting sales tax as far back as 2001. During a House Judiciary Committee hearing, then Amazon Vice President Robert Comfort testified: "Although a single, nationwide rate applicable to all remote sales would be the simplest approach, Amazon.com does not believe it would be necessary. One rate per state would work very well." Amazon has continued to voice this view, even incorporating it into their 2011 Annual Report: “We support a Federal law that would require sales tax collection under a nationwide system."
Amazon doesn’t oppose collecting sales tax because the online shopping proposition is about far more than price alone. In many cases Amazon is more expensive than its offline competitors, but is perceived by consumers as worth the added cost in exchange for the convenience it delivers, in areas such as:
- Endless Assortment: As the world’s largest online retailer, Amazon and sellers in the Amazon Marketplace carry just about anything you might be looking for.
- Customized Shopping Experience: Amazon uses its data at the individual shopper level to email and surface to the shopper only the most relevant products browse and purchase history. The result: a fully individualized shopping experience including personally relevant, affinity product recommendations. With 30 percent of shopping research starting on Amazon, versus just 13 percent on Google according to Forrester, Amazon's dominance of the shopper’s path to purchase -- online or offline -- remains indisputable.
- Individualized Shopping Aids: A shopper can use the search bar or the category menus. She can shop at work, at home or in bed. And she can focus on item descriptions and pictures, or fellow shopper reviews. Amazon allows shoppers to shop how they want and when they want, with an army of shopping aids not available in offline retail.
- Fast (often free) Delivery: No more lugging boxes up steps, hauling bags of dog food out of the trunk, or unhappy children in tow down the grocery aisles. Browse, click, and wait for the delivery to your doorstep. Need it today? Amazon is working on that too. As quickly as Amazon forges a tax agreement with a state, it puts up fulfillment centers close to population centers to cover the “Last Mile.” Amazon already offers same-day delivery in ten major US cities with more on the way. And the Amazon Fresh local grocery delivery service, currently available just in Seattle, offers the promise of same-day groceries along with your Amazon.com purchase.
There are no doubt shoppers deterred from buying online in states where sales tax is collected. But with Amazon already collecting sales tax on more than half of its revenue, a national online tax law is unlikely to slow Amazon’s meteoric growth because the eCommerce value proposition extends far beyond the perceived “discount” of avoiding sales tax. Amazon and eCommerce sellers have found many ways to meet shopper expectations better than offline retailers, but avoiding sales tax collection has never been on the list.