As we approach the biggest online shopping days of this year, Slate.com investigates how Amazon exploits tax laws to undersell the competition.
For example, Slate.com reports, about Apple’s new 11-inch MacBook Air with a price tag of $999 — this sum you’ll pay at Apple.com, Best Buy or any other large retailer. But Amazon.com sells the same model at a slightly lower price – $979.
That difference seems relatively insignificant until you go through the checkout process. At Best Buy’s or Apple’s Web sites, the final price will be $1,101.
However, at Amazon.com, the final price will be the same as what’s listed on the product page: $979. So, at Amazon.com, the Apple’s new MacBook is more than $120 cheaper than at Apple or any other large retailer. Why? Because of sales tax, of course.
Unless you live in Kansas, Kentucky, New York, North Dakota, or Washington state, you’ll pay no sales tax on many purchases from Amazon. This gives Amazon a huge price advantage over most other national retailers.
You’ll get an especially good deal at Amazon if you’re making big purchases and you live in an area with high taxes. In Chicago and Los Angeles, for instance, state and local taxes add up to 9.75 percent, the highest in the nation.
In those areas, the 64-gigabyte iPod Touch, one of the best holiday gifts this season, which sells for $399 at Apple, $387 at Best Buy, and $383 at Wal-Mart is the cheapest of all at Amazon—$382, without the $30 you’d pay in taxes at other stores.
The same price advantage applies to a wide range of products at Amazon.com. So, if you’re choosing between Amazon.com and any other large national retailer, you’ll almost always get a better deal at Amazon because of tax savings.
Why doesn’t Amazon charge you sales tax? It has to do with the regulations states use to determine which companies must collect taxes. According to the 1992 Supreme Court ruling, companies are only required to collect sales taxes from their customers when they have a presence in the state in which they reside.
So, if you buy something online from the website of a company that has physical stores in your area, you’ll most likely have to pay taxes.
But when you shop at online-only stores, you pay tax only if the store has substantial operations in your state. Since Amazon’s headquarters are in Seattle, you have to pay taxes if you live in Washington State, and because it has warehouses in Kentucky, Kansas, and North Dakota, you’ve got to pay taxes there too.
Sales tax is a touchy subject for Amazon. Local retailers have long protested that online stores’ tax-free status gives them an unfair price advantage. Amazon, wary of provoking state or federal authorities, has played down this advantage.
In a brilliant report on Amazon’s tax strategy, Michael Mazerov of the Center on Budget and Policy Priorities points out that company representatives have long argued that Amazon’s tax advantage is not a big deal.
“People shop online for convenience, for huge selection and great prices, and not because of any sales tax issue,” a spokesman said in 1999. And an executive once told a group of state tax administrators that “we don’t consider tax as a competitive advantage.”
However, Michael Mazerov argues that Amazon’s actions suggest that taxes have always been a primary consideration. Jeff Bezos, Amazon’s founder, moved from New York to Seattle to start the company. “We could have started Amazon.com anywhere,” he told FastCompany.com in the interview in 1996.
“It sounds counterintuitive, but physical location is very important for the success of a virtual business. We could have started Amazon.com anywhere. We chose Seattle because it met a rigorous set of criteria,” he said.
“It had to be a place with lots of technical talent. It had to be near a place with large numbers of books. It had to be a nice place to live — great people won’t work in places they don’t want to live.”
Amazon has aggressively fought state efforts to impose sales tax on its operations. In 2008, New York passed a law that required online companies to collect taxes if they had deals with marketing affiliates based in the state. The law was designed specifically to target Amazon and other large online retailers—many called it the “Amazon tax.”
In response, Amazon sued New York over the law’s constitutionality—marketing affiliates, Amazon argued, did not constitute a significant presence in the state.
While Amazon is still fighting the New York tax law, the company has been collecting taxes in the state as per the legislation. But Amazon has pushed back against collecting taxes in three other states that passed similar laws. And it has threatened to do the same in other states—including California—where legislators have proposed affiliate-related taxes.
So, is Amazon’s tax-free status unfair? Of course it is. As Mazerov points out, Amazon has physical operations in 17 states in which the company and its employees enjoy the fruits of local taxes—police and fire protection, roads, hospitals, and other infrastructure that make its operations possible.
Yet Amazon skirts tax collection in most of these places through clever legal tricks. For instance, it has incorporated its warehouses and Web site as separate legal entities in order to argue that it doesn’t really have a presence in Nevada, Texas, and other states.
Given the obvious unfairness of Amazon’s tax status—and given the clear loss in revenue for cities, counties, and states—you might wonder whether it is in some sense unethical to shop at Amazon. Is it your civic duty to buy from stores that collect sales taxes even if you’ll get a better deal from Amazon?
Amazon’s tax status is unfair, but that’s the law. As long as you’re doing nothing illegal — don’t forget to report your purchases at the end of the year — you’ve got every right to seek out the best deal you can get. [via Slate]