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The Big Amazon Subsidy is Doomed

, October 11, 2017, 0 Comments

Amazon battled states for years to avoid having to collect sales taxes. Walmart was on the other side of the fight, along with state revenue offices. Walmart had to add sales taxes to all its sales in California, whether online or brick-and-mortar, which at the time ranged from 7.25% to 9.75% depending on location. For shoppers, that price difference was reason enough to switch to Amazon. It was in essence a massive taxpayer subsidy for Amazon.

But Amazon lost that battle and started charging sales taxes in California in September, 2012. State after state followed. By early 2017, Amazon was charging sales taxes in all 45 states that have state-wide sales taxes and in Washington DC.

Still, even in 2016, online retailers dodged paying $17.2 billion in sales taxes on out-of-state sales, according to the National Conference of State Legislatures. For them, it’s a massive price advantage that other retailers didn’t get.

The fight over sales taxes is based on a Supreme Court case of 1992 – Quill Corp. v. North Dakota – that barred states from forcing companies to collect sales taxes if they didn’t have physical facilities in those states, such as stores or warehouses.

For Amazon, this got increasingly complicated as it is building out its distribution network, with warehouses and facilities around the country. So now Amazon is collecting sales taxes.

Problem solved? Nope.

Amazon only collects sales taxes on sales of inventory that it owns (first-party sales). But Amazon is also a platform that sells merchandise owned by other sellers (third-party sales). About half of the goods sold on the Amazon platform fall into this category. Amazon leaves sales tax collections to the 2 million merchants on its platform. But they claim that it’s not their job to collect sales taxes, and most of them don’t collect them. Hence, third-party sales still get the taxpayer subsidy.

Amazon isn’t the only out-of-state retailer or platform. It’s just the biggest one. eBay and many others are impacted by it too. Legally, this remains murky. But states and brick-and-mortar retailers are fighting to get the subsidy scrapped.

“It’s a fairness issue,” Minnesota Senator Roger Chamberlain told Bloomberg. “Right now, there’s an unlevel playing field that disadvantages brick-and-mortar stores.”

And December 1,  just in the nick of time for the holiday sales season, could be a big turning point.

An amnesty agreement in 24 states — including Florida, New Jersey, and Texas but not California and New York — and Washington DC has been hammered out by Multistate Tax Commission (MTC) that would provide Amazon merchants partial amnesty from back taxes if they agree, among other things, to register and collect sales taxes no later than December 1.

Online sellers with potential tax liability could negotiate a settlement that could lead to some or all of their back-taxes being forgiven. The catch? Online sellers must meet certain eligibility requirements and apply for amnesty between August 17, 2017 [and] October 17, 2017. They must also voluntarily disclose their tax obligations by submitting a voluntary disclosure agreement.

“It’s not clear how many merchants will sign on,” according to Bloomberg. “Because so many have complained about the tight timeline, the states are holding a meeting on Wednesday [Oct. 11] to decide whether to extend the deadline.”

And there are more complications – the promise of 50,000 jobs:

Amazon has launched a nationwide search for a second headquarters location that could employ up to 50,000 people. So states taking an adversarial position against Amazon by trying to collect taxes are simultaneously trying to lure the company for a major investment. Sellers fret that Amazon will have leverage to push the tax collection burden onto them.

“Sellers are scared,” Paul Rafelson, a corporate tax attorney advising these sellers on the amnesty agreement, told Bloomberg. “They don’t think they did anything wrong, but they don’t know if they can afford to get caught. They want to know why the states aren’t going after Amazon like South Carolina.”

South Carolina is not part of the amnesty agreement, but is among the states that have taken this into their own hands. Bloomberg:

South Carolina is going after Amazon directly in court, saying it owes $12.5 million in back taxes, penalties, and interest from third-party sales. Amazon has vowed to fight the case.

Minnesota … in June enacted the country’s first law requiring companies like Amazon and EBay Inc. to collect sales taxes on goods sold by third-party sellers. They’ll have to comply in 2019 – or even sooner in the event the Quill ruling is overturned.

Washington followed with a similar law that takes effect in January.

Massachusetts, meanwhile, got a court order forcing Amazon to turn over by mid-October the identities of marketplace sellers doing business on the site since 2012. That could set off a scramble among states competing to collect back taxes, says James Thomson, a former Amazon senior manager who now advises merchants how to sell on the marketplace. “If Massachusetts succeeds,” he says, “it’s going to be a bloodbath.” Amazon has yet to indicate if it will provide the records or challenge the ruling.

Congress could clarify the situation and create a set of rules for all states, instead of letting states create a cumbersome patchwork, but that hasn’t happened yet. So, for now, as online sales continue to surge, it’s up to the states to determine who will be responsible for collecting sales taxes: The platform (Amazon) or the third-party seller.

In this battle, sellers want Amazon to collect sales taxes, while Amazon wants sellers to collect sales taxes. However this will ultimately be settled, they both appear to have lost the two-decade battle to dodge sales tax collections.

Other retailers have never been able to benefit from this vast taxpayer subsidy. They have to compete on price without it. Some of them have been driven out of business. Sales taxes are no fun for consumers, but a level playing field will give other retailers belatedly a better chance to fight off Amazon, but only after Amazon has already gotten so big, in part due to this subsidy, that practically no one can fight it off.

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