Recently, Amazon – and other e-tailers – started collecting sales taxes on purchases made in California. The Los Angeles Times reports that the state could generate as $317 million from all e-tailers during its first fiscal year – which is a much needed revenue stream for a state that is projected to be north of $16 billion in debt.
Predictably, consumers are generally upset knowing that their free ride is essentially over. Alternatively, local brick and mortar stores are ecstatic because the playing field would now be level. The benefit to the state of California is clear.
However, the question on my mind is: What is the silver lining for Amazon?
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Amazon faced two choices: walk away from the state or comply with the new tax law. Given the importance and size of the state, and given the fact that taxation is not new to the brand (Amazon currently collects sales tax in Kansas, Kentucky, New York, North Dakota, Pennsylvania and Texas), it complied. Once all is said and done, consumers, the state and Amazon all could actually benefit – the rare win–win–win for all involved.
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The benefits to California are documented and known: extra revenue. However the benefit to both Amazon and residents of California are just being revealed. As part of the delay Amazon originally got in collecting taxes, the company agreed to open two distribution centers in the state. One is located outside of Patterson, east of San Jose. The other is in hard-hit San Bernardino. In my view, these are just the first of many distribution centers to come.
The centers will add jobs in areas that need them and give Amazon access to potential employees that previously were shut off to the company unless people were willing to relocate. In addition to speeding up delivery times, Amazon, if it chooses, will be able to do the following:
- Same day delivery: One of the knocks on buying from Amazon is that you can go to your local Target or Toys R Us and get the item right away. After all, we are a culture of instant gratification. The option to offer same day delivery will help to reduce cart abandonment, a key e-commerce metric, which will improve Amazon's revenue. I expect that in the beginning same-day items will be limited. But as Amazon increases distribution centers (five to seven would be ideal, potentially creating thousands of jobs) it will be able to offer an order by 2pm, delivery by 6pm – or something reasonably close.
- Scheduled deliveries: This is a big deal for both Amazon and consumers – and opens up the perishable category to both. This is similar to Amazon Fresh, a grocery service, currently being offered in Seattle. In addition to perishables, if consumers need a last minute birthday gift, they could easily jump on Amazon.com and have that Sonic Emotion powered sound dock delivered directly to their hotel, office, home or party.
- Integration with local shippers: The localizing of Amazon will allow it to merge shipments and have them delivered via UPS, FedEx, or potentially some sort of Amazon delivery service, thus streamlining operations. This is also likely to reduce fixed costs, which Amazon can pass on to consumers. Consumers will also benefit from potential cost savings in receiving one shipment versus multiple shipments. That shipping cost savings alone could be enough to offset the tax.
- Open new product delivery avenues: Interstate commerce laws prevent the shipping of alcohol across borders without proper licensing. However this does not apply to shipping wine in-state. Want your favorite Napa red delivered in time for your party and you live in Los Angeles? Go to Amazon. Flowers could also be an arena that Amazon could get more aggressive in - after all, most online flower e-tailers do not offer same day delivery, yet.
- IT expansion: Amazon could also build upon its leading position as a cloud host provider and expand to IT services. The laptop that you bought from Amazon crashes? Get a replacement the same day.
So what about the consumer? No matter how you cut it, a tax is a tax is a tax and paying taxes is not necessarily a good thing. Amazon CEO Jeff Bezos and his team are not foolish. In addition to the above they will likely do the following to make the taxes more palatable by:
- Providing consumers with service and delivery flexibility similar to "one click" that at the end of the day will save consumers money
- Expand kiosk delivery service, which is currently in Seattle at 7-11 stores, to California, making shopping more convenient. Order something online and have it delivered to a shipping kiosk at LAX – in time for your flight.
As mentioned, the brick and mortar owners are welcoming the change. In my view Amazon's executive team will have no choice but to become hypercompetitive, even more than they are now. Competition is good for all residents and the ying and yang of this is that the teams at Target, Wal-Mart, Best Buy and the like will also need to be ready for the Amazon influx. This will lead to better options and value for consumers.
If Amazon does this right, everyone could benefit. If Amazon does not – for example, sticking with just two distribution centers – the driving to Target or Toys R Us may just win the day.
Rajeev Kapur is the CEO of Sonic Emotion. He previously was Director of Sales and Marketing – Dell China.
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