Inter-organizational Studies. Coverage
of a current event.
Issue
There has been an ongoing battle between brick-and-mortar stores, which are
subject to collecting sales tax, and online retailers, whom have mostly been
exempted from collecting sales tax. Brick-and-mortar
stores say they view this as an unfair advantage for Amazon.[1] To better their disadvantaged position against
online retailers, brick-and-mortar stores have joined forces to, as they claim,
level the playing field.
Overview
Amazon's freedom from the obligation to collect sales tax has supplied them
with a price advantage over their brick-and-mortar competitors. Small businesses to large retailers such as Wal-Mart,
Best Buy, Target, etc. have joined the Alliance for Mainstreet Fairness and
have been fighting for the correction of what the Alliance claims to be a tax
'loophole'.[1] Although
Amazon has been fighting back, an increasing number of states are requiring
that Amazon collect sales tax from consumers. Some of the states in which Amazon now
collects sales tax are: Kansas, Kentucky, New York, North Dakota, and
Washington.[5] Country-wide
this will mean about a 5% - 9% price increase to consumers.[4] Beginning in this month of July, Amazon has begun
collecting sales tax in Texas, effectively meaning a roughly 6% increase in
price to Amazon's Texas consumers.
Amazon's battle in Texas started in 2010 when they were issued a $269
million tax bill.[4] As
stipulated by Texas law, companies with a physical presence in Texas must
collect sales tax.[4] Amazon retaliated
by closing down their Texas plant and claiming they do not have a presence in
Texas.[4] The ultimate
outcome of the dispute has led to Amazon both charging sales tax in Texas and
being forced to expand their operations in Texas.
Amazon has been losing similar battles across the United States. They have duely asserted that the present tax
system is too complex to calculate and collect per state and they request a
standard national approach.[4] Their assertion is not incongruent with the
wishes of the Alliance for Mainstreet Fairness.[4]
Expected Outcomes
In the short term, I expect that Amazon will continue to lose their battles
against collecting sales tax. It appears that the Alliance is winning their
combined efforts against Amazon's 'unfair' practice. This could have a
substantial effect on Amazon's market share due to an increase in what was a
previously attractive price relatively. This outcome shows the power of the combined efforts of large companies.
In the long term, I think it is possible that a standardized national tax
system could be constructed that would be better suited for large online
retailers. Both Amazon and the Alliance for Mainstreet Fairness have stated
that they support such an approach.
Managerial Implications
For the retailers that have combined their efforts to fight for this, the
implications seem that management will find it easier to keep from losing
potential customers to Amazon. There are still considerable cost advantages for
online retailers, but this is a battle won for brick-and-mortar stores.
For Amazon the implications aren't so positive. Management will need to
find a way to retain their current market share by minimizing any loss of
customers to the retailers over whom they have previously held a price
advantage.
References:
1. "Alliance for Main Street Fairness." Standwithmainstreet.com.
N.p., n.d. Web. 15 July 2012.
2. Krantz, Matt. "Amazon.com Could See Price Advantage Fade With Sales
Tax." ABC News.
ABC News Network, 30 June 2012. Web. 15 July 2012.
3. The News & Advance. "Tax Equality Online a Step Closer to
Reality." The News & Advance. N.p.,
15 July 2012. Web. 15 July 2012.
4. TOMLINSON, CHRIS. "Amazon, Texas Reach Deal to Settle Sales Tax
Spat." Yahoo! News.
Yahoo!, 27 Apr. 2012. Web. 15 July 2012.
5. "Sales Tax Requirements." Amazon.com. N.p., n.d. Web.
15 July 2012.
Although having sales taxes applied to Amazon may hurt some of its customer base, I feel that they won't suffer too much from it. Amazon still offers a great variety of products that many stores do not. You can purchase anything from toothpaste to big screen televisions through Amazon and consumers like the convenience of being able to shop from home and being able to have the best prices available which makes it a lot simpler than going from store to store comparing products.
ReplyDeleteI agree with you. But then again my opinion is based on my spending habits within Amazon. I buy things that I can't really get anywhere else and they aren't THAT expensive to where 6 % is anything substantial. I may now choose to shop Amazon over their brick-and-mortar competitors though. I personally think that this is a shady move and has nothing to do with being 'fair', but it's not like the government is going to turn away millions in new revenue. The brick-and-mortar stores threw their own customers under the bus because Amazon had something they didn't. Now everybody loses.
DeleteI stumbled upon a message board or forum within Amazon's own shell when researching this though. Seems many people are angry and blaming Amazon for the price increase and are threatening to close accounts and cancel prime memberships. Ironic I guess, how they would then choose to shop at the true culprits stores.
I don't think having sales tax will hurt Amazon too much. People are used to paying sales tax, and the convenience of being able to order from home along with the more extensive variety of products that might not be available in brick and mortar stores could far outweigh the public's aversion to the tax. Of course, when you add in shipping charges, it can increase the amount paid quite a bit.I can see Amazon's point that it would be difficult to charge tax based on each state's sales tax because they are all different. A national sales tax for large companies that deal online would be simpler. I wonder how many other big online companies are in the same boat as Amazon. Maybe they need to form an alliance similar to the Alliance for Mainstreet Fairness to determine strategies to keep their market share.
ReplyDeleteI think a national standardized approach would help Amazon quite a bit. It's not just that every state has a different tax; there are then different taxes within each state. Some states have additional requirements as well, such as: sending purchase statements to all of your customers at year end, sending purchase statements to the state government at year end, etc. Keeping track of the different taxes and requirements, correctly assessing the tax per consumer, and meeting all additional requirements should add to Amazon's administrative expenses. Additionally, if Amazon collects too little they will be stuck with the bill. These retailers have turned what was once an advantage for Amazon into a disadvantage. Even if it may be considered a small one, my speculation is that this is closer to their true motive, than 'fairness'.
DeletePersonally I think they should get rid of most taxes not continuously add to, but we all know that will never happen. I understand where the brick and mortar stores are coming from, but they also have the ability to sell on the internet. So instead of crying for the government to get involved (which never helps anyone) they need to figure out other methods to combat Amazon and online retailers. Let’s face it, this has implications that far outreach just this one online retailer and will make online purchases more expensive across the board. Just from my personal experience most online retailers have around the same price as the brick and mortar stores until you factor in shipping and in most cases when you make small purchases the online purchase will become more expensive. Either way I feel the “fairness” crowd is doing all consumers a disservice and we are all going to be hit in the wallet eventually.
ReplyDeleteExactly, I feel as if everybody loses as well. I don't think it has much to do with fairness. That was one of the benefits of being an online retailer, you had limited physical structures and that had its cost advantages. Brick-and-mortar stores are losing market share to these online retailers in part due to a shift in consumer purchasing and their costs are staying relatively static. I also think they should find other ways of competing rather than involving the government.
DeleteI really enjoyed reading this article because I use Amazon.com all the time for purchases. I really think that charging the sales tax is inappropriate unless the warehouse is in the state that the consumer resides in. With that said, I do not believe Amazon has distribution centers in Texas, so I think it is wrong that the state forced them to do this. In my opinion, I think its Texas who is running out of money so they try to nickel and dime businesses as well as consumers for more revenue to cover their debts. I think it will have a negative effect on Amazon's revenues but I believe the company will find a way around it and create more promotions to compensate for the the additional cost of doing business.
ReplyDeleteI agree, and Amazon actually closed down their warehouse in Texas to retaliate against Texas' tax bill. According to Tomlinson, Rick Perry was against Susan Combs issuing the tax bill to Amazon because it cost Texas jobs and discourages companies from operating in Texas. I don't know what exactly led to the settlement, but Amazon is being forced to expand operations in Texas as well as collect the sales taxes. They must invest $200 million in capital expenditures in Texas and create at least 2,500 jobs. I think the Alliance and state governments have their own ulterior motives.
DeleteThis was also a great article for me since I have been an avid user of amazon especially because I didn't have to pay taxes. Though it probably won't make much of a difference for me and I will more than likely continue to shop through Amazon.com because of the convenience, I do agree that taxes should not be charged to Texas residents. No Amazon warehouse is actually located in Texas so I don't see how the state can levy a tax when Amazon operations are not located in the State. I highly doubt that this will have too much of an effect on Amazon revenues though.
DeleteAmazon has had a distribution center in Irving, Texas since 2006. They shut it down in April of this year to retaliate against a tax bill accumulated from 2005 - 2009. Due to the agreement between them and Texas, Amazon will need to continue a physical presence in Texas.
Delete2 examples of why I think the sales tax will hurt Amazon's revenues:
- Consumers will physically have less they can purchase with. For prime members: $20 can't buy $20 dollars worth of goods on Amazon anymore -- it can buy $18.70 worth of goods. The same math applies to all members who do pay shipping -- a 5% - 9% decrease in purchasing power. Surely this won't affect every person and every sale the same, but extrapolate this to the millions in sales they conduct and their widespread economical reach.
- Being sales tax free was one of Amazon's biggest cost advantages. They had a 5% - 9% price discount, free to them, on ALL items, which other retailers could not touch. This is a BIG advantage and it is being taken away. Amazon's consumers are now paying more for the same value. A lot of the items Amazon sells are price sensitive.
Everybody has different incomes, purchasing habits, and psychological make-ups, so surely the tax will not hurt every segment the same. When the government starts levying millions of dollars in taxes, somebody has to pay. To say that Amazon's revenues will not be hurt is to say that NONE of Amazon's consumers have limited disposable and discretionary income (Example 1), and that ALL Amazon consumers are completely content footing these multi-million dollar tax bills alone (Example 2). This goes against economical theories.
I agree with the first comment by Miguel, that people will still use Amazon for the mere convenience of it. I think this holds especially true for people living in remote areas where they have to travel a considerable amount to brick and mortar stores. Although a sales tax will raise the price of goods, it's still beneficial to save gas money which is arguably a much higher cost for some people. However, I also agree with your assertion that there should be a standardized national tax, although I'm not sure what it should be. Perhaps they could just do a national average, but it would be upsetting for the states who have low state taxes to have to pay a higher tax just for shopping online. I think you were right when you said everyone loses here.
ReplyDeleteI agree. I think it's also really relative to the location and psychology of the individual. Some people will drive out of there way to make it to a gas station that sells slightly cheaper gas, even though the net effect loses them money. Similarly, Amazon is going to lose customers that refuse to pay the increase out of 'principle'. A look at the message board on Amazon's site shows that there is actually quite a number that fall into this category. This may only be a small percent of Amazon's total customer base, but it is still a percent.
DeleteSo yeah, for the most part I agree, some segments (like the ones you mentioned) won't be hurt at all, while others may see varying degrees of customer loss. Overall, I don't think all these big name retailers would have been complaining for as long as they have if Amazon wasn't drawing customers by being sales tax free.
The U.S. government will eventually place sales tax from online retailers with or without brick and mortar stores lobbying for it. There is just too much revenue that could be created from taxing online purchases. It's a shame becasue we are taxed on everything, soon enough we will be taxed for breathing too! (that last comment was just a lame joke if you couldn't tell)
ReplyDelete