April 18, 2011
Amazon, Target, and Sales Taxes
Not paying state and local sales taxes is not Amazon's biggest advantage over brick and mortar Target. In fact, even at up to 10% it is a relatively modest advantage compared to the real advantage of convenience and usually lower prices.
Anyone who wants a Nintendo Wii console or the latest John Grisham novel can pick it up at the nearest Target (TGT) store or log on to Amazon.com (AMZN) and have it delivered. The similarities between the two retailers aren't as apparent when it comes to taxes. Amazon's effective rate—the total it pays in federal, state, local, and international income taxes after deductions, along with its sales and property levies—has been more than 10 percentage points lower than Target's for the past four years. Target's effective tax rate in 2010 was 35.1 percent, compared with Amazon's 23.5 percent. Amazon in 2010 owed $352 million in income taxes worldwide on income of $1.5 billion, according to its SEC filings, while Target owed $1.58 billion on income of $4.5 billion. Amazon, the world's largest online retailer, has successfully resisted efforts from politicians to make it collect state and local taxes that brick-and-mortar rivals must charge. Tax laws "absolutely" put Target at a disadvantage, says Brian Sozzi, an analyst with Wall Street Strategies in New York. "It's one of the reasons why Amazon has been so successful."
Federal and state income taxes are of more interest to wall street than to customers so let's focus on the sales tax aspect of this. Also, the article specifically calls out Amazon's advantage over Target's brick and mortar stores. What I will say next would be slightly different if we were comparing Target's online store to Amazon.*
Certainly, not collecting sales tax is an advantage to Amazon. But, Amazon seems to do pretty well in its home state of Washington were they do collect the near 10% state and local sales tax. Forcing Amazon to collect sales tax will not be a panacea for the brick and mortars:
- Amazon typically has lower prices than Target. Even Target.com does not match Amazon prices except for things like the Nintendo Wii console which neither can discount
- Customers do not have to get in a car or on transit to get to Amazon. The further you live from your brick and mortar store the greater Amazon's advantage.
- Customers can place an order with Amazon from their office at 10 AM, or from their home at 11 PM. Target and other brick and mortars that are not open 24 hours a day can not touch this convenience.
- A variant on the last point: you can place an order wherever you have connectivity. You can only by from a brick and mortar store, well, at a brick and mortar store.
They understand, though, that sales tax aside they are still at a large competitive disadvantage to good online stores and many, like Target itself, have started their own online operations which will continue the cannibalization of brick and mortar stores. The malls may soon be as desolate and main street has become in many cities.
Most of the agitation for internet sales tax collection I've seen over the past few years has not been by the brick and mortars rather it has been by state and local governments whose goal is not to help out the brick and mortars. Rather, governments just want more money.
*The Nintendo Wii console is the same price at both Target.com and Amazon.com. Assuming items that are priced the same at each, sales tax could make a meaningful difference if you live in a sales tax state. Of course, brickandmortar.com will also have to overcome the relationship that just a few of us already have with Amazon.Posted by Steve on April 18, 2011