BEFORE settling on Seattle as the home of Amazon.com, the founder, Jeff Bezos, considered placing the company on an Indian reservation near San Francisco. “This way, we could have access to talent without all the tax consequences,” he said in a 1996 interview with Fast Company.
The reservation couldn’t be used as a sales-tax haven, after all, Mr. Bezos said he learned, so he had to look elsewhere. Offering prices free of sales tax to customers in California, the most populous state, would be possible only if the company were placed elsewhere. “You have to charge sales tax to customers who live in any state where you have a business presence,” he said then.
Today, Amazon collects sales tax in only five states, which gives it a continuing advantage over companies who do collect them in all or most states. Competitors aren’t the only ones hurt by Amazon’s stance on sales taxes: it also means the loss of considerable revenue to states and localities that badly need it.
The final tally on this holiday season’s sales are not yet in, but Amazon’s revenue for the four most recent quarters, ended Sept. 30, approached $21.7 billion. Amazon will not disclose how much tax it collected on those sales.
In addition to its home in Washington State, Amazon has facilities in North Dakota, Kentucky and Kansas, and collects sales taxes in these states. The company also collects sales tax in New York, but not cheerfully: Amazon has gone to court to overturn a law passed last year that compels it to collect from New York residents.
Yet these five do not exhaust the roll call of states in which Amazon has additional corporate offices, fulfillment and warehouse operations, customer service and other facilities. Fourteen more (among states with sales taxes) are listed in the company’s last annual report: Arizona, California, Delaware, Florida, Indiana, Michigan, Nevada, New Jersey, Pennsylvania, South Carolina, Texas, Virginia, West Virginia and Wisconsin. But Amazon.com does not collect for any state on that list.
Amazon has found a way to put portions of its business into the tax-haven equivalent of reservations. By creating wholly owned subsidiaries for the parts that are treated separately for tax matters, Amazon is under no obligation to collect sales tax. This legal technique is called “entity isolation,” said Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities in Washington.
Amazon has offices in four cities in California, for example, including those that are home to the subsidiary that developed the Kindle. “Because the subsidiary isn’t selling the Kindle directly to consumers, Amazon can drive a truck through the loophole,” Mr. Mazerov said.
He argued that Amazon is deliberately maximizing “the significant competitive advantage it gains over its rivals when they must add the typical 5 percent to 10 percent tax to their prices, but Amazon does not.”
An Amazon spokesman declined to comment about Mr. Mazerov’s assertion. But in its last quarterly report, the company told investors in its discussion of risk factors that the imposition of sales-tax collection by more states or Congress could “decrease our future sales.”
In 2000, Mr. Bezos appeared before booksellers attending BookExpo America and presented the case why his company shouldn’t be compelled to collect sales taxes for purchases made by customers other than those who lived in Washington.
“In Washington State, where we have a presence, we get police protection, we get fire protection. We send our kids to local schools,” he said, according to The Associated Press. He said he didn’t understand why, “since we get no services from North Carolina, that they should be able to force us to collect taxes for them.”
That was then. Today, employees of Amazon’s wholly owned subsidiaries presumably get police and fire protection and other services even though the company is not collecting sales taxes in the states where they’re located. And this may be a good time to point out that states and localities are having a bit of a tough time paying bills. The Center on Budget and Policy Priorities estimates that state budget gaps for this year and next year combined will be more than $350 billion.
Wider collection of the sales tax is not going to plug a hole of that size, but every billion or two would help. In California, the State Board of Equalization estimates annual tax revenue losses of $1.085 billion from unpaid “use taxes,” which are supposed to be paid for out-of-state purchases.
Some 147 million people, or half the nation’s population, live in sales-tax-levying states where Amazon has facilities but does not collect tax on residents’ purchases.
An Amazon spokesman described today’s sales taxes as “very complex,” but said the company would welcome a “simplified system, fairly applied to all business models.”
If the complexities that its retail competitors have mastered really are an insuperable difficulty for Amazon, it could contract with a commercial vendor that specializes in these calculations, like Vertex, as Netflix does.
Meeting the tax-collection obligation is “not very hard,” said Reed Hastings, Netflix’s chief executive, in a comment posted last year on a New York Times blog.
IT would seem hard for Amazon to argue that the complexities of collection are too overwhelming. It already handles the online sales of its partner, Target.com, for whom it collects sales taxes for all but two states that assess them.
If Mr. Bezos wanted to do his part to avert layoffs of schoolteachers and firefighters and, yes, professors at state universities, he should start collecting the sales tax.
Amazon’s in-house counsel should help the company meet its civic obligations — and toss “entity isolation” in the trash can. Amazon’s employees are too scattered, its customer base and its sales too large and the states’ fiscal crisis too grave for it to continue to play tax-avoidance games.
Randall Stross is an author based in Silicon Valley and a professor of business at San Jose State University. E-mail: email@example.com.