Amazon has built its empire on the legitimate advantages it has over retail shopping: an endless range of products at a steep discount and stunningly good customer service. But it has also benefited from one unfair advantage over its bricks-and-mortar competitors: it does not have to charge a sales tax, which American states levy in varying amounts on consumer goods. Depending on where you live in the US, this can save you up to 12 per cent on purchases, making it foolish not to buy online when you can.
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Twenty years after Amazon was founded, the US Congress is finally addressing this loophole with a bill that would allow states to require online retailers to collect tax. What is interesting about this is not the debate around the Marketplace Fairness Act, which is expected to pass the Senate next week. There really isn’t any – even Amazon concedes in principle that the playing field ought to be levelled. It’s what the delay tells us about a political system so compromised and sclerotic that it cannot correct even the most straightforward economic unfairness in a timely fashion.
Online businesses have been able to avoid collecting sales tax based on state laws dating from the era when local shopping was the norm. Companies without a “physical presence” in a state did not have to charge tax if they shipped goods from elsewhere. It was up to customers to pay “use taxes” on purchases instead. Few have been scrupulous enough to do so and states have no means to track dodgers.
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As Amazon expanded, its chief executive Jeff Bezos treated this anomaly as a right and deployed the techniques of rent-seeking to protect his advantage. He spent millions of dollars on lobbyists, deployed an army of lawyers and cultivated political allies with campaign contributions. Amazon’s smaller competitors struggled to make their case. Nor was there any customer constituency for tax collection, even though consumers paid indirectly through diminished public services.
At the state level, Amazon became a litigious bully, an instance of the modern company powerful enough to dictate terms to impoverished sovereigns. When challenged over the collection of taxes, it warned that it could take thousands of jobs elsewhere. As California teetered near bankruptcy a few years ago, it cut ties with local affiliates and threatened to fund a referendum to overturn the legislature’s decision to make it pay tax. Its strategy devolved into delaying the inevitable. When a state looked likely to win in court, Amazon would negotiate and agree to collect taxes, usually with a stipulation that it didn’t have to start for a few more years.
In this cynical game, Amazon has been able to count on the connivance of congressional Republicans who stand for the proposition that representation without taxation is liberty. A principled conservative believes that taxes should be low, consistent and fair. An American Republican, by contrast, believes that both taxation and the effective collection of revenue are government abuses. This ideology is codified in the anti-tax pledge, now signed by most of the GOP, that was drawn up by Grover Norquist, whose organisation Americans for Tax Reform leads the opposition to taxing online purchases.
Tax-hating Republicans grab for any argument at hand. In the old days, it was that taxing ecommerce would kill the just aborning Golden Goose of the Internet. Others assert that compliance counts as too much of a burden on small businesses, which could be victimised by endless state tax audits – ignoring the exemptions for small merchants who sell less than $500,000 a year in goods. Amazon’s lobbyists worked to make the proposed threshold even lower, apparently in order to give validity to this argument.
What has changed? Essentially, Amazon has become so dominant that it no longer cares to fight. It has played out the clock longer than it dared hope and would now like to be able to build warehouses everywhere without doing state-by-state battle over its “physical presence”. In other words, this is not a case of Congress finally choosing to act. It is a case of the owners finally giving it permission to do so.
The writer is chairman of the Slate Group