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How Amazon Built Its Empire On One Tax Loophole

By Alan Pyke  

"How Amazon Built Its Empire On One Tax Loophole"

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Amazon.com has reshaped American commerce in just two decades. But how much of the online shopping empire’s success owes to innovation and entrepreneurial genius, and how much of it stems from cheating the system?

Without the loopholes it uses to avoid state sales taxes, new research shows, Amazon loses a substantial portion of its customers’ spending to alternative retailers. In five states that closed the sales tax loopholes that make Amazon’s prices more competitive than what in-state retailers can charge, the site’s sales fell by 9.5 percent.

For large purchases where the sales tax advantage would be most pronounced, the researchers found an even steeper drop in Amazon spending. When states close their online sales tax loopholes, “consumers decrease their spending by 15.5% on purchases larger than $150, and by 23.8% on purchases equal to or larger than $300.” These findings come from a National Bureau of Economic Research (NBER) working paper which examined data on millions of shoppers from before and after the implementation of so-called “Amazon tax” laws in California, Pennsylvania, Texas, New Jersey, and Virginia.

The money that stops going to Amazon mostly goes to competing online retailers, according to the NBER paper, but some of it also reverts back to the brick-and-mortar storefronts that have been getting pushed out of business by online shopping for years. Had the web giant not enjoyed these huge price advantages over the past 20 years, of course, those other online retailers that customers now turn to might not have developed. When the company launched in the mid-1990s, the alternative businesses positioned to capture all the spending that sales tax fairness displaces from Amazon today would mostly have been physical stores.

What’s bad for Amazon is also good for state governments in this case. California’s online sales tax law brought in more than a quarter-billion dollars of revenue in its first year. While another dozen states have closed the Amazon loophole, estimates of how much tax revenue state governments are losing still come in around $20 billion per year. A bill to close the loophole nationwide passed the Senate last year but has stalled in the House, even though Amazon itself supports the bill and major business groups like the Chamber of Commerce have urged Congress to pass it.

As Amazon’s about-face on that bill suggests, changing the tax system isn’t going to drive the company out of business at this point. Its model, which relies on outsourcing its physical warehouse labor to ruthless logistics firms that treat workers poorly and provide only low-paying, temporary, and grueling work, can absorb the change. But by leveling the sales tax playing field, lawmakers would not only restore some competition to the marketplace but also give a significant economic boost to the low-income families who are disproportionately affected by sales taxes.

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