Amazon.com Inc. for years has fought state efforts to force it to collect sales taxes from its customers. Now, instead of battling the tax man, the company is looking to profit — by hiring itself out as an Internet tax collector.
In an abrupt about-face, the company is now offering to handle sales-tax chores for merchants who sell products through its site for a fee equivalent to 2.9% of the taxes collected.
The optional service, which is set to roll out Feb. 1, will be offered to Amazon’s third-party vendors in all 50 states. It’s a strategy that could reap millions of dollars in new revenue for Amazon, which has been among the most vocal opponents of government attempts to tax e-commerce.
Analysts said Amazon’s shift is an acknowledgment that Internet retailers ultimately will have to play by the same rules as bricks-and-mortar stores. It’s also a recognition that there’s money to be made in the process, said George Runner, a member of the California State Board of Equalization, the agency that administers sales tax.
“This is what smart businesspeople do,” Runner said. “They are going to use whatever model they can to expand their business opportunities. They’re very slick at it.”
Seattle-based Amazon currently collects sales taxes from its own customers in Washington, New York, Kentucky, Kansas and North Dakota, as well as in some foreign countries where it does business. In the U.S., Amazon and other online merchants have long contended that they’re legally obligated to collect sales taxes only in states where they have a physical presence.
But the rise of Internet commerce has made it a plum target for wider taxation. U.S. Internet retail sales topped $176 billion last year and are expected to reach $279 billion by 2015, according to Forrester Research Inc. Online sales currently account for about 9% of total retail sales, a share that’s projected to triple over the next few decades. State and local governments are determined to force Amazon and others to pay up.
“The reality is … that they are going to be collecting sales tax,” said Benjamin Schachter a senior analyst for Internet and interactive entertainment stocks for Macquarie Capital (USA) Inc., a New York investment bank.
In California, Amazon recently abandoned a much-criticized effort to repeal a new Internet sales tax law passed by the state legislature this year. Instead, the company cut a deal with the administration of Gov. Jerry Brown to start collecting and remitting California’s 7.25% sales tax, plus local sales taxes, beginning Sept. 15., 2012.
That agreement was a victory for traditional retailers, who say they’ve lost billions in sales to Internet merchants that sell identical merchandise free of sales taxes. But news that Amazon now is angling to make a buck from those levies has some fuming anew. Wal-Mart Stores Inc., Target Corp. and major chains continue to push legislators to close legal loopholes that allow Amazon to dodge sales-tax collection in most U.S. states.
“It’s hypocrisy of the highest order,” said Jason Brewer, a spokesman for the Retail Industry Leaders Assn. in Arlington, Va. “Now, they’re trying to profit from collecting sales tax everywhere else, while still digging in their heels from collecting for their own company.”
Amazon’s new offer is aimed at hundreds of thousands of independent U.S. businesses, ranging in size from tiny used-book sellers to major manufacturers, that sell their products through the Amazon.com site. Amazon works with about 2 million such sellers worldwide but won’t specify how many of those are based in the U.S.
Nearly 40% of the merchandise sold worldwide by Amazon comes from third parties that use the company’s Internet platform to do business, Macquarie analyst Schachter said. Amazon last year posted net sales of $34.2 billion. About half of those sales required Amazon to collect sales taxes or value-added taxes from U.S. and foreign buyers, Schachter said.
Amazon, like other e-commerce retailers, earns commissions and fees for sales made by third-party sellers that use its site. But the company’s move to charge its affiliates extra for collecting sales taxes may be an industry first.
Wal-Mart, for example, does not charge for collecting sales taxes for the independent vendors that sell through its online store, Wal-Mart spokesman Daniel Morales said. Neither does Best Buy Co., whose website is also open to third-party sellers. E-Bay Inc. provides its sellers some online tools for calculating state and local sales taxes but leaves collecting and remitting those levies to them.
Last week, Amazon told merchants that sell their wares through Amazon’s Marketplace Professional and Webstore programs that they were eligible to take advantage of the service. Amazon said it would calculate and collect the taxes, then send those funds back to the affiliate sellers, who would remain responsible for remitting them to state tax agencies.
“Tax collection services now available,” Amazon announced electronically in posts on the “help” section of its website and in messages to its sellers. “Your seller account now has access to tax collection services that enable collection of U.S. sales and use taxes on your orders.”
Streamlining tax collection could benefit mom-and-pop vendors that sell through Amazon, but how many are willing to pay for that convenience remains to be seen.
“Amazon is offering a way to simplify complying with the tax laws. That’s all to the good,” said Debra Schepp, a Washington expert on e-commerce and social networking whose books are sold on Amazon.com. “But, on Feb. 1 when the 3% [fee] starts, it may not feel quite as good to the sellers.”
Until recently, Internet retailers haven’t had to worry much about collecting sales taxes from their out-of-state customers. Lawmakers in the late 1980s and 1990s granted exemptions to foster the growth of e-commerce. In 1992, the U.S. Supreme Court enshrined the principal into law in a decision that said the sales tax should be collected only when a seller has a physical presence in a state, such as a store or a warehouse.
Support for that narrow interpretation began to crumble in the last few years as national retail chains and independent store owners complained they were victims of unfair competition from Amazon and other e-sellers that could undercut their prices by as much as 10% by not adding sales tax. (Consumers are supposed to pay those taxes, but rarely do.)
Amazon called the current patchwork of differing state sales tax laws “an unconstitutional burden” on commerce. It said it supports collecting the sales taxes but only if it’s done consistently from state to state, according to a national formula approved by Congress. Amazon is backing a proposed interstate agreement that would require participating states to write similar sales tax laws.
Other lawmakers, including Rep. Jackie Speier (D-Hillsborough), are pushing for more straightforward measures that affirm the rights of California and other states to force Internet sellers to collect sales taxes.
But the company’s decision to reverse its long-standing opposition to collecting sales taxes — and to profit in the process — “clearly affirms Amazon has the capability to collect tax on these sales despite its prior assertion it could not,” said Betty Yee, another Board of Equalization member.
She predicted that Amazon’s Marketplace retailers would pass the 2.9% fee on to their customers in the form of higher prices.