By Martin Lariviere
For those of us who do a lot of on-line shopping, one of the advantages is not paying sales tax. In the US, on-line and catalog retailers are not obliged to collect local sales tax as long as they do not have a meaningful presence in the state. Thus, if you buy an iPod from Apple’s (AAPL) website, you pay sales tax if there is an Apple store in your state but do not if you live in a state free of Jobsian retailing. Not too surprisingly, the growth of on-line retailing has caused to many states to try to get what they see as their due. This usually reduces basically to picking a fight with Amazon (AMZN), the biggest on-line seller. (See here for a recent Economist article on Amazon’s current battle with California.)
While Amazon clearly benefits from allowing its customers to lower their total costs without cutting in to its own margin, a Wall Street Journal article suggests it might actually benefit from giving up its sales tax fight because that would lead to a more sensible distribution network (When the Levy Policy Breaks at Amazon, Jul 26).
The common thinking is that Amazon’s tax-free sales give it as much as a 10% pricing advantage in high sales-tax states such as California and Illinois. Credit Suisse estimates the company would lose 2.7% of its North American sales, which were $18 billion in 2010, if Congress passed far-reaching federal online sales-tax-collection legislation.
But collecting sales taxes nationwide could have benefits. Amazon places many of its warehouses outside high-population states and away from major urban areas. Analysts believe it does this to avoid establishing a business presence that would force it to collect taxes in a state. One warehouse in Nevada, for example, by the California border, serves the Golden State.
If it starts collecting sales taxes, Amazon could build warehouses in or just outside major cities. The result: potentially lower shipping time and costs. That is important for a company that had operating margins of just 3.3% in the year’s first quarter. It may also allow the company to pursue other opportunities, like a textbook-rental-by-mail service.
This is an interesting take on how sales tax affects Amazon, but I am a little dubious about how much they would redo their operations if there were a shift in their responsibility to collect sales tax. First, there are many large markets that can be served well from across state lines. Chicago is the prime example here. The Loop is just not that far away from either Indiana or Wisconsin. Admittedly, Southern California or Houston that may be a different story, but shipping to them in two days from a neighboring state shouldn’t be too hard.
That gets to the second point: How big is the market for premium delivery? That is, how many people really need stuff delivered the same day as they order it? If that market is large, then more locally focused distribution may be worth something. But I am just not convinced that many people need to get that shirt or book this afternoon — or at least need it bad enough to pay a premium for it. This is even more so as some of Amazon’s bread-and-butter categories (books and other media) go digital.
There is one service that Amazon has offered that would require more local presence to really pull off. That is AmazonTote, which basically puts customers on a schedule. Delivery would be free but would always come on the same day. That is, whatever you ordered this week would be delivered on Tuesday. Back in January, the Seattle Times was reporting that Amazon was looking to expand the program. However, Amazon’s website now says it closed in March. In a lot of ways, this is a program that makes some sense in terms of locking in customers and it could pay off in areas with dense populations. That is certainly something that could make it worth giving up the tax fight.