Paying Sales Tax on Online Purchases
Since the early days of internet shopping, state governments have been frustrated with the complexity of taxing online commerce. Does one collect tax in the state where the good is shipped, the state where the good is received, or the state where the transaction takes place (e.g., where the company has its servers that process the transaction)? Previously, the practice of various states to tax online sales transactions that occurred entirely within their own states caused online retailers such as Amazon to carefully manage their physical presence (e.g., distribution centers, call centers) in order to avoid such taxation and thus maintain an advantage over their primarily face-to-face competitors.
But the days of no (or limited) online taxation appear to be over. The state of California just implemented a ruling that online retailers will have to charge and collect state sales tax (as high as 9.75%) on internet sales. Such action by California will clearly lead the charge for other states to follow suit.
Effects on Online Retailers such as Amazon
The lack of sales taxation on online purchases has given Amazon a net pricing advantage over local face-to-face businesses in states where sales taxes are relatively high. This is particularly the case for high-priced goods that have relatively low shipping costs. For example, consider purchasing a $2,000 camera at a local California store where sales taxes might be as high as $195 (and the price likely higher) versus purchasing online where the only additional monetary cost is a shipping charge of $20. As long as consumers were willing to wait a day or two for delivery, Amazon would most often come out ahead.
But new sales tax rules level at least one part of the playing field between Amazon (and other online retailers) and local face-to-face retailers. Without the tax advantage, Amazon can still compete on price alone, but that must now be low enough to justify the additional delivery time without the tax savings consumers previously enjoyed.
Will Amazon Change its Physical Presence?
As other states emulate California's new law, online firms such as Amazon will cease to be so limited on where they can have an online presence. Amazon distribution centers will likely spring up around various metropolitan areas so that more customers will enjoy the same-day delivery that the company currently offers in the Baltimore, Boston, Chicago, Indianapolis, Las Vegas, New York City (and parts of New Jersey), Philadelphia, Phoenix, Seattle, and Washington, D.C. markets. In fact, as the number of distribution centers increases, and the lack of tax differentiation takes effect, what's to stop Amazon from opening retail locations that directly challenge Walmart, Target, Sears, Kmart, Best Buy, and others?
The Future of Online Competition
The taxation change and its resulting effects also will affect smaller online businesses that used to be able to compete with Amazon with respect to delivery times. It has been said for years that the internet allowed even the smallest individual to compete with the largest corporation. Are those days now limited? What types of firms will still enjoy the online advantage? How will taxation changes affect e-marketing? And what's next for Amazon? Did you know that Amazon was offering self-service pick-up locations at 7-Eleven stores as well as grocery delivery trucks? What will they do next?
|Amazon lockers located in 7-Eleven stores.|
Even in an internet world, face-to-face still seems sensible.
Some additional reading to peruse:
Dreier, Hannah (2012), “Tax on Amazon purchases in Calif. begins Saturday,” Newsweek (September 13), <http://www.businessweek.com/ap/2012-09-13/tax-on-amazon-purchases-in-calif-dot-begins-saturday>.
Martinez, Amy (2012), “As tax-free sales go, Amazon looks to speed, convenience,” The Seattle Times (September 1), <http://seattletimes.com/html/businesstechnology/2019048905_amazontax02.html>.
Santo, Michael (2012), “So it begins: Amazon.com, Web retailers start collecting sales tax in California,” Examiner.com (September 15), <http://www.examiner.com/article/so-it-begins-amazon-com-web-retailers-begin-collecting-sales-tax-california>.