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Amazon Tax in California Reveals New Amazon Competitive Advantage

Posted by Brian Greer on Thu, Sep 13, 2012 @ 12:57 PM

As we continue to track “Amazon Laws” and their implications, Amazon begins collecting sales tax in California on September 15.

The law that Amazon has battled against and big box retailers have supported may be Amazon’s biggest asset in realizing retail domination. It sounds surprising, but read on.

California’s internet sales tax collection is the result of an agreement between Amazon and the State of California.  Last year, California, in need of new sources of revenue, passed a bitterly fought Amazon law requiring out-of-state businesses with in-state affiliates to collect sales tax.  Through various negotiations and promises by Amazon to build warehouses in the state, the law was temporarily repealed and now goes into effect later this week.

Internet customers in all states, including California, have always had the obligation to pay the tax on internet purchase.  However, states have no authority to force out-of-state businesses to collect and remit the tax, a restriction based on the Commerce Clause in the US Constitution.  But only 0.42 percent of California income tax filers in 2009 actually did that, led by Santa Clara County, which had a compliance rate of 1.03 percent.

As expected, larger internet retailers, led by Overstock.com, are looking to overturn the law in California.  At first glance, the issue seems to be simply the collection and remittance of sales tax.  But, for Amazon’s competitors, this is turning out to be a fight for market share and maybe survival.

Now that it is forced to collect sales tax, Amazon no longer has a built in price advantage of roughly 8%.  Losing their competitive advantage in one place requires Amazon to gain a competitive advantage in another place else they face obsolescence.  So, Amazon has begun a multi-billion dollar effort to reduce shipping times and costs.  It is building a million square foot distribution center near Los Angeles.  There are others under way in Indiana, New Jersey, South Carolina, Tennessee and Virginia.

The goal is to improve distribution to next day.  It’s a huge bet.  But if it works, they may “out WalMart” other big box companies, providing affordable goods with affordable next day delivery all from the convenience of your home.

The sales tax law that Amazon fought so vigorously may be the source of their on-going competitive advantage.  Interesting.  It brings a new meaning to the term “Amazon Law”.

To learn more about Sales Tax, subscribe to TaxConnex’s sales tax handbook.  In the handbook, we talk about the US Constitution, the Commerce Clause, Quill v North Dakota, Amazon Laws and more.

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Topics: sales tax nexus, sales tax compliance, Amazon laws, Amazon, California