Congress Backs Borderless Internet Sales Tax (And So Does Amazon)

• By Marcus Wohlsen
• 03.26.13       http://www.wired.com/business/2013/03/congress-backs-internet-sales-tax/

Democratic U.S. Sen. Al Franken, who represents Best Buy’s home state of Minnesota, supports a borderless internet sales tax. So do Republicans. So does Amazon.
Photo: Aaron Landry via photopin

The fairy tale of Washington bipartisanship became a reality, if however briefly, as Democrats and Republicans in the U.S. Senate united behind what’s typically the thorniest subject in politics: taxes.
In a non-binding resolution passed last week, 75 senators from both sides of the aisle agreed that states should be able to force any internet retailer who makes more than $1 million in sales annually to collect sales taxes for them, regardless of whether the retailer physically does business in the state.
The amendment to a budget bill merely takes the temperature of the Senate on the issue of a so-called internet sales tax. Another vote would still have to happen to send the idea on its way to becoming actual law. But any tax sponsored by a Wyoming Republican, in this case Mike Enzi, that Al Franken also supports seems destined for safe passage through the Senate.
“Today’s vote proves that an overwhelming majority of Senators support this bipartisan legislation to level the playing field for brick-and-mortar retailers,” said Illinois Democrat Dick Durbin, another big backer.
For politicians, that’s a sound bite that’s easy to get behind. Brick-and-mortar businesses both small and large — from Barnes & Noble and Best Buy to Target and Walmart — back the bill. So do nearly 70 national trade groups, both liberal and conservative.
Guess who else supports the bill? The one company whose business would seem to be more deeply affected than any other if such a bill were to become law — and the one company at which this legislation would appear to be directly aimed: Amazon.
Other retailers have long complained that Amazon’s dazzling rise stems in no small part from the exemption it’s long enjoyed from collecting sales tax in states where it lacks a physical presence. Amazon already possesses the distinct advantage over competitors such as Best Buy that comes from not having the overhead of physical retail spaces to maintain. Its lower costs have allowed Amazon to race to the bottom on price.
Until recently, even if Best Buy charged the same $500 for a model of digital camera, a buyer in California would effectively have paid nearly $50 less on Amazon, since Amazon didn’t have to collect the sales tax. (Of course, buyers are still legally obligated to pay that sales tax to the state when they file their taxes, but hardly any do.)
Amazon ultimately struck a deal with California that put off until last year a state measure requiring the company to start collecting sales tax. At the time, Amazon said it hoped uniform federal regulations for online sales tax collection would make the state law unnecessary. In exchange, Amazon promised to build warehouses in California and create thousands of jobs.
The federal law didn’t materialize, but the warehouses have. And it’s these million-square-foot embodiments of Amazon’s retail might that should give traditional brick-and-mortar sellers pause when considering why the company would support a resolution that would seem to strip the e-tailer of its price advantage.
Once Amazon no longer enjoys the price advantage of not collecting sales tax, the company has no incentive to keep its physical operations outside a state’s borders. This is what happened in California: While Amazon was able to pitch its warehouses as a boon to the state’s economy, the company also gained massive outposts on the fringes of the state’s two largest population centers — the San Francisco Bay Area and greater Los Angeles. Now brick-and-mortar retailers in those regions must compete with more than Amazon the online retailer; they have to compete with Amazon’s own bricks and mortar.
Not that shoppers will travel physically to Amazon’s newly nearby warehouses. But they won’t have to. By moving closer to large concentrations of its customers, Amazon increases its efficiency in shipping, which lowers its costs and keeps prices down. The company can redistribute its inventory to keep more of what SoCal customers want in SoCal and more of what NorCal customers want in NorCal. Once federal government requires online retailers to start collecting sales tax in all 50 states, Amazon will have no incentive to stay out of any of them.
Amazon bulls and bears debate whether customers in states such as California and Texas that now require the company to collect sales tax are buying less. But in both states, Amazon’s new physical infrastructure is still under construction. Brick-and-mortar stores in those states have yet to feel the effects of a fully operational Amazon just a few miles away.
Already Amazon has shown no hesitation in extending that physical footprint straight into cities with its lockers. It could turn out that forcing Amazon to collect sales tax nationwide could be the worst thing to happen to brick-and-mortar retail. Competing with Amazon was tough enough when it was just a company in Seattle with a big warehouse in Kentucky. What happens when one of the world’s biggest stores, online or off, suddenly moves right into your backyard?