Online Sales Tax: A Non-Issue

by Danny Silverman , September 27, 2012

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.

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4 comments about "Online Sales Tax: A Non-Issue".

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Risa Pecoraro from Homesite Insurance, September 27, 2012 at 12:41 p.m.
Hi Danny,
This article makes a lot of good points, especially around why the customer experience (convenience, personalization, etc) will trump getting the lowest purchase price. And Amazon's delivery structure (both fees and timing) further supports that. I'd be interested to see what happens to other companies who are used to charging premium delivery fees as they are pushed into charging tax. It starts to add up and might influence discretionary spending.
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Valerie Frank from Valerie Frank TV, September 27, 2012 at 6:10 p.m.

I don't mind paying sales tax on Amazon. What I do mind is paying $79 to become a Prime member and then dealing with their "add-on" BS after the fact. BOO!

Danny Silverman from Etailing Solutions, September 28, 2012 at 1:03 p.m.

Risa: I completely agree. There are multiple shipping price schemes out there while all consumers are really seeking is free shipping. Eventually, those hurdles will come down and retailers will find other ways to cover their costs as Amazon has done.

Valerie: The Add-On program is indeed controversial. It breaks the Amazon promise represented by Prime. Their hope is that by expanding their selection, they more than make up for that broken promise, but given the presence of Marketplace sellers already selling those items, I don't believe they have achieved that balance.

Danny Silverman from Etailing Solutions, September 30, 2012 at 4:47 p.m.

Note from the author: the below is reposted from another forum on this same topic, in response to this article. The commentator was unable to login to post it here, and so I repost it her with his permission:

"Great article, however, the real issue for imposing online sales taxes on businesses without actual nexus to the state imposing the tax has nothing to do with Amazon (who is big enough to absorb whatever additional cost such actions impose) but to the small businesses that are trying to compete for an ever shrinking piece of the market while competing with the company on the "march to global retail dominance." Furthermore the "support" that Amazon now offers for imposing such a tax is hypocritical at best -- namely that now that the company has been forced by states and their business model to admit that their warehouses in a state establish nexus with that state, they are attempting to impose the most costly and burdensome sales tax on EVERYBODY in order to drive as many smaller retailers out of the online market."

My response:
For one, Amazon is consistent at least - they have always (since 2001 at least) asked for a simple tax system for online sales. I can't speak to whether they are advocating for the MOST burdensome sales tax, though that seems counter intuitive, esp if one holds the argument that Amazon views not collecting sales tax as a competitive advantage. Two, it's very hard to ignore the fact that, like it or not, paying sales tax is an obligation. Even where the sellers doesn't have to collect, the consumer is still obligated to pay sales tax. In every business model there are complexities. If you do business online, you must be prepared for the complexity of multi-state commerce - to complain that doing so is unfair is to complain about the very business model they operate under. And last - and this is specific to the space in which I work, which is with large manufacturers - I remain convinced that most of the sales in the online marketplaces of commodity brands (Consumer Packaged Goods) are long-tail sales well beyond the intended distribution model of manufacturers and retailers. In other words, their product isn't sourced from the manufacturer or even legit distributors. It's promo-hacking (my term), it's various levels of theft, and it's diverted and/or grey goods, or even counterfeit. For products that are ingested or applied to skin, it represents a danger to consumers for as long as the marketplaces go unmonitored and unregulated the way traditional retail is today. As my boss likes to say, we are one headline or 60 Minutes story away from the entire online marketplace space coming under a microscope, particularly for ingestibles, grocery, and FDA regulated products/OTC's.