Why sales tax on e-tailers is the wrong idea

Jeff Bezos Amazon’s CEO recently provided a good interview at the SSCR summit ( Consumer Reports). Among the questions that he answered was the one about the sales tax controversy.

 

Several states are now beginning to roll out legislation that will have retailers like Amazon pay state sales tax if they have affiliates in that state. Traditionally sales tax has been reserved for companies that have brick and mortar business in that state. In Amazon’s case, the states are arguing that because Amazon has hundreds of affiliates marketing products and services, sales tax should also apply. Amazon on it’s behalf insists that this is counterproductive as it is an online business without local presence. As a response, they severed ties with several affiliates in states like Illinois in March, that passed a law to collect sales tax from online entities.

 

 

I think Bezos did a good job of articulating their position – one of the comments that was quite significant, was that Amazon already pays sales tax for over 50% of its business. Now we can assume that he was referring to the size of the business by revenue. That means that of the $34.2 Bil revenue they declared in Q4 ’10 , over 50% was post sales tax paid- ie Revenue on the Income statement will always exclude sales tax. Assume that the average sales tax was about 8% worldwide ( in Europe known as VAT) and 51% of the $34 Bil was in this category, then the total sales in this area will be $17.34 Bil and the Total sales including sales tax will be 17.34/(1-1.08) = $18.84 Bil. Hence sales tax revenue generated was about $1.5 Bil ( 18.84 – 17.34).

 

 

From a different angle, Wikipedia says about 40% of sales for Amazon is from affiliates. From the Q4’10 report, US sales was about 55% of total at 18.7 Bil. Assume that this 40% is applicable to US sales uniformly- then 40% of $18.7 Bil works out to about $7.48 Bil. Based on an average affiliate commission of about 6% ( range of 4% to 8%), this would have generated about (0.06 * 7.48) = $448 Mil for affiliates.

 

 

In other words Amazon is generating an amazing amount of sales tax revenue and affiliate revenue who in turn pay state income taxes. ie everyone is winning. If more states get into the ‘legislation’ bandwagon, everyone will get hurt. Staying the course will actually generate more revenue for the states and create more jobs in those states.

 

 

Now does cutting out affiliates hurt Amazon?. Probably a bit in the short term, but in the long term it has probably figured that there will always be states from which affiliates can operate – they will just move over to a favorable state to preserve a business relationship with Amazon. Also if the states think that this lost revenue can be replaced by brick and mortar companies, that may be quite unlikely. The consumer will still be online looking for deals and they will always go to the cheapest and biggest selection source- Amazon continues to provide those benefits to consumers by far.

 

 

In the long run, the states that hold out enforcing sales tax on e-tailers will win big on overall tax revenues, as there will be a dramatic concentration of affiliates and volume in those states. Online sales continue to grow over 12% year on year and that trend is expected to continue for the next 5 yrs.

 

 

One can only hope that good sense prevails individual state’s senators and they look elsewhere to boost state incomes. In the list of wrong ideas to pursue this can only be among the biggest.