This week’s decision by the U.S. Supreme Court that overturns a pre-Internet requirement that a company have a physical presence in a state in order to be compelled to collect sales tax on behalf of that state is the biggest legal gift Amazon has received in a long time. It is perhaps the biggest legal gift it has ever received. Of course that can be hard to tell from all the press this week, so I’m going to dive in on it. One important disclaimer, I had nothing to do with (and have no proprietary information about) the retail side of Amazon. These are my personal opinions.
In the early days of the Internet the lack of sales tax on most transactions played a role in the growth of eCommerce. Of course, one can debate just how significant that role was since the lack of sales tax was only one of the attractions. The lower price of the purchase itself, convenience of shopping from your desk at work or at home, and (my continuing favorite) access to a vast set of items, sizes, and styles that you couldn’t easily find in local brick and mortar stores, arguably had far more influence over the shift to online shopping. However significant the lack of sales tax on the Internet may have been back in the late 1990s, its role has been diminished over time. I don’t think there are any Millennials who heard about this weeks Supreme Court ruling and went “that’s it, I’m going to have to start going to the mall every Saturday”. For you Millennials and Centennials, that was the normal shopping experience in the pre-Internet days. Particularly in the golden age of Blue Laws, when stores did not stay open late enough to shop after work during the week and then were forced by law to close on Sunday. So Saturday was it. But I digress.
My overall guess is that the lack of sales tax played at most a minor factor in the growth of eCommerce, and most of that boost came in the first few years. But it might have played a bigger role in who the winners and losers were in eCommerce. It’s pretty obvious on the surface that if a web search shows up two suppliers of Product X at the same price, and one collects sales tax and the other doesn’t, that you are likely to buy from the one that doesn’t. BN.com (Barnes and Noble) might have been disadvantaged by having to collect sales tax while Amazon.com did not, but Buy.com and other early pure-play online book sellers had the same sales tax advantage as Amazon yet it was Amazon and Barnes and Noble as the last two standing. If you time travel back to 2000, the Amazon vs. BN.com discussion wasn’t around sales tax it was about Amazon’s recommendation engine. Both were about equal at letting you buy a book, but Amazon was the far better site for discovering new things to read. Moreover, it was Amazon’s leadership in e-books that drove the longer term shift in book buying and reading habits. Kindle, not Sales Taxes, was the ultimate differentiator.
As eCommerce grew the pressure for retailers to collect (and remit) sales taxes grew with it, and since Amazon was growing the most that put the focus on Amazon. Until fairly recently Amazon was reluctant to collect sales taxes. While there are no doubt technical complexities involved (and the Supreme Court decision references those, some states have complex rules with multiple taxing authorities), it was mostly competitive. Amazon collecting sales tax when key competitors do not leaves it at a disadvantage. Given how data-driven Amazon is, they no doubt knew exactly how much negative impact there would be in any given state when they started collecting taxes in that state. They could then compare the business advantages of having a physical presence in the state with the negative impact of collecting sales tax in making decisions. Offering Prime Now (which requires local distribution centers), pop-up kiosks for Echo, Fire TV, and other digital products, having AWS sales offices, etc. outweigh the (likely slight) downward pressure on sales from collecting sales taxes. So after a few years of gradually expanding the states it collects sales taxes for, Amazon went to collecting sales tax in all 50 states.
Amazon still doesn’t collect sales tax when it is providing a marketplace for third-party sellers. Legally that is the seller’s responsibility, and this is a case where I think there are likely technical complexities at work too. With the physical presence model Amazon would have needed to be aware of every location the third-party seller had a physical presence so it knew to collect the tax. If the seller failed to notify Amazon that it had established a physical presence in another jurisdiction then it could have left Amazon legally exposed. At least it seems likely that Amazon’s attorneys would have been making that point. But with the physical presence requirement no longer in force, it it would be easy for Amazon to collect sales tax for any state based purely on shipping address.
For Amazon what the Supreme Court ruling does is level the playing field. No eCommerce competitor will be able to undercut it based on not collecting sales tax. And its own marketplace sellers will not be able to undercut direct Amazon sales by matching Amazon’s price but not collecting sales tax. Since Amazon already collects sales tax on its own sales, there is no change in its position relative to brick and mortar competitors like WalMart. For Amazon, this Supreme Court ruling looks like a complete win.