An excellent little piece of economic research here detailing the manner in which the imposition of online sales taxes reduce Amazon’s sales in those places where they are imposed. All of which creates a bit of a headscratcher as Amazon has recently come around to the idea that online sales taxes are a pretty neat idea. In the absence of a collective brain spasm we’ve got to assume that Amazon sees some benefit to the company in sales taxes being imposed even if this forces its sales down.
As the abstract says:
Several states have recently implemented laws requiring the collection of sales tax on online purchases.
In practice, however, only Amazon.com has been affected. We find that households living in these states reduce Amazon expenditures by 9.5%, implying an elasticity of –1.3. We find the effect to be more pronounced for large purchases, for which we estimate an elasticity of –3.2. Further, we find that the decline in Amazon purchases is offset by a 2.0% increase in purchases at local brick-and-mortar retailers and a 19.8% increase in purchases at the online operations of competing retailers.
So why is Amazon supporting the roll out of the online sales tax to other retailers?
Part of it is that, as the paper goes on to explain, that rise in sales at other online retailers is taking place, in good part, on the Amazon Marketplace. Where Amazon collects fees for providing the platform, but the retailers aren’t charging sales taxes themselves. Given Amazon’s famously tight gross profit margins they might actually be making more out of this arrangement than if they try to sell direct.
We could also try to construct some story whereby Amazon executives have worked out where their moral duty lies and decided to campaign for what is good for America. You know, state and local government needs funding, untaxed online sales are depriving screaming babies of their meagre crusts and…..well, no, perhaps we won’t take that very seriously as a line of thought.
What’s really happening here is all about “permanent establishment”, as I described in the Twitter and Turkey case. If you’re an out of state retailer then, in most states at least, you don’t have to charge sales tax on your sales into that state. What should happen is that the consumers should dutifully add up how much they’ve bought from out of state each year and then add the relevant amount to their tax return. Amazingly not many people do this. But this then leads us to trying to define what is an out of state retailer.
There, as with international corporate taxation, the definition is whether there is a permanent establishment or not. If you’ve not got a base in the state in question then you’ve not an establishment, you’re an out of state retailer and don’t have to collect the tax. If you do have a base in state then you’ve got to collect the tax as you’ve got that establishment. The paper under discussion uses the change of some states requiring out of state retailers to collect as the base for its findings. But the above is still generally true.
And what’s happening at Amazon is that in order to be able to fulfill our consumerist desires ever more swiftly, most especially as they try to move into the groceries space, they’ve been building out their warehouse system. Meaning that they have permanent establishments in ever more states and thus have to collect sales tax in ever more states. And, in US law, a warehouse is a permanent establishment, unlike in international tax law where it is specifically excluded from being one. Which gives us the interesting example of Amazon arguing both sides of the tax coin dependent upon geography.
Over here in Europe, Amazon’s profits should be taxed in Luxembourg because that’s where the sales are and all those warehouses out there aren’t permanent establishments. In the US, because warehouses are such establishments then sales tax should be collected if there’s a warehouse in the state of delivery.
And, of course, the big leap forward: if Amazon now has to collect sales tax in ever more states as a result of it’s warehouse network then, well, it’s as plain as the nose on your face that everyone should be collecting sales tax, isn’t it? As opposed to when Amazon didn’t have the warehouse network when Amazon shouldn’t have to collect it. This is obvious, isn’t it?
Which is why we’re seeing Amazon supporting the collection of sales tax on online sales even while it knows that the practice reduces its own sales. For it’s going to get caught having to collect them as it expands anyway: so, might as well make sure everyone elses’ sales suffer too, right?
[Illustration by Brad Jonas]