Monday, September 30, 2013

Will Amazon be the next Walmart? New tax laws may be the catalyst.

Discussion of taxation often focuses primarily on income taxes, whether at personal or corporate levels, or on payroll taxes.  Lost amidst all this attention, however, is the fact that newly implemented sales taxes on internet purchases have been gaining ground in the United States.  While the effect on knowledgeable consumers has been predictable, there are many who have no clue as to the changes that are being made and how such taxation will change the business practices of online sellers.

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.

Stay sensible,
Anthony

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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>.



13 comments:

  1. After reading this post and doing so research I found a lot of interesting information. I always turned to Amazon as my go-to Online store because usually it had lower prices and tax was not included. In my case, Amazon had always and advantage towards any other online site. I enjoyed being able to spend less in a product and not to pay taxes and now that this law is being issued, I wonder if Amazon would keep its lower prices. However, I don't think that Amazon would become the next Walmart because I think that even if these companies provide similar services, in my opinion each company has a different target market due to the variety of their products and services
    In addition, even though I am an Amazon frequent consumer, i didn't know that Amazon had pick up stations in Seven Eleven. It is really interesting too, how we are never completely aware of what companies really offer.
    Florencia Pendola

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  3. Now what? i usually buy all my make-up and electronics in amazon. I never noticed that we benefit from getting taxed less. This is going to be really heartbreaking. If these rules really spread around the internet stores, small businesses will close. I hope that they can come up with some sort of deals where the products are still cheaper than the stores and people continue shopping online.
    If Amazon continues to stay on-top with other similar companies where the gov can let them continue selling with tax-preferred options, that would be ok. i think the internet shopping experience will continue to remain the same if the gov compromises. Great post prof, I didn't know about the amazon shopping services in places like NJ or NY where I can have it delivered quicker. Great Info!

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  4. I agree with Sandra, even though I shop at Amazon from time to time I was not aware off the advantage that we had with tax-free shopping. With this in mind and because of the lack of knowledge that we as consumers have in regards to this benefit, I feel that this new Bill will not affect the sales of Amazon. Shopping online is easy and effective, and more consumers are using it their main purchasing method.
    Finally I believe that this new bill will not affect dramatically Amazon, but it will most definitely benefit the government who will receive a huge share of this new and increasing type of shopping.

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  5. Did Amazon not charge tax? I did not even notice. In my case I would not mind paying an extra 6% whenever I buy a book or some iphone case. However, we must take into consideration the different target markets amazon has. There might be consumers doing daily shopping on amazon, others might be buying expensive items. 6% out of 100,000 makes quite a difference.

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  6. As a frequent shopper, I've been enjoying these tax tree items from amazon or eBay. I think if they start putting taxes on these items, and I'm not saving at least a few dollars, I might just go to the store and buy it instead. I believe many people will think that way too since you'll be getting the product instantly, instead of having to wait 4-5 days for shipping. No one is patient these days!

    I also was not aware that Amazon had self service pick up locations. I think that was a pretty neat idea, if it meant receiving your item sooner.

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  7. It's interesting because I had no idea this was going on. Our benefits as consumers are definitely at a lag, but Amazon will never be doomed. If anything, it was only a matter of time before laws like this would begin to be passed. I don't believe this will affect big internet retailers like Best Buy, Walmart, or Amazon. But, I definitely think smaller corporations like eBay should watch out for these laws.

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  8. Well the tax increase will not effect amazon. They are now supporting it anyway ! They saw that with the few states that they HAD to charge the tax, it was not really hurting them as expected. Due to their high range products and most importantly their mass of sales, it still allows them to still get huge markups, even higher then the tax imposed, and also many small brick and mortar shops do not have that type of scale anyway and so ultimately still will not be able to compete.

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  9. I don't think this will be effective on the long run. I am a democrat that is pro taxation. Like I already post on a classmate's blog, I don't think businesses could grown much without having to increase other costs or paying other taxes. A reason why I maybe so hesitant is because it would take years for the entire country to agree with this law and establish new parameters. we are currently having trouble in the congress I don't think we need more.

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  10. Antyerlin your right this will not effect the majority of the country anytime soon. Due to the time it take to establish laws and parameters in each individual state. I don't believe this market will effect major companies like Walmart or Best Buy even when it goes into affect. As for the later years with this issue of taxing, I believe the lowest total price will be the most in favor for consumers.

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  11. Before reading this blog, I did not realize that tax was not included on purchases made on websites such as Amazon. I do not shop online often, normally only when I need textbooks for classes, but I never noticed there were no taxes charged on my purchases. I think it is unfair that some online stores such as Amazon have been able to avoid charging taxes whereas other businesses with physical locations such as Target or Walmart have had to collect sales taxes. I thought the same laws and rules would be equal to all businesses who conduct sales and transactions online, but I understand the issues in the past on which state should collect the taxes. It does seem to have its confusion on which state should collect the taxes, but I think Amazon made a smart business decision avoiding the legality of taxing and limiting their presence in the past. My question for the future is, will Amazon be profitable or lose sales due to this change? Also, can Amazon really compete with well-known businesses that are already established and have a physical presence such as Walmart and Target? Amazon would need to spend its current funds on building or buying new locations, and would need to analyze if expanding multiple physical locations would be beneficial and profitable.

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  12. Professor I like your post, it is very informative and has a lot if information that was worth knowing. I consider myself a frequent online shopper, not as much as my wife but I do my fair share. Her and I think alike and we will probably shift to the traditional way of shopping if we are going to get hit with taxes on certain items. I guess it really depends on how fast we need an item we may choose to walk into a store and walk away with the item that moment as opposed to waiting several days. So basically if there is a tangible benefit we would steer away from online shopping and if there is no rush or tangible benefit might as well stay home and do it from the comfort of our home.
    In your post I also learned a neat fact about amazon and its locations that it has so that items can be claimed faster if one did not want to wait the 4-7 business days we typically wait for shipping.

    -Miguel Angel Salazar -

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  13. It is comprehensive and before TurboTax it took me a full week to prepareour taxreturns. WIth TurboTax it takes an evening.

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