It
looks like the Marketplace Fairness Act--the official name for a
proposal to allow states to collect sales tax on internet sales made to
their residents--will pass the Senate sometime today. It will have a
tougher time in the House, where Republicans still aren't keen on
supporting anything that smacks of higher taxes. Still, it's
remarkable, at least because it shows that under the right
circumstances, you can get at least some members of the GOP to support a
tax increase.
I wrote about this plan a couple of weeks ago,
noting that the biggest issue with the bill is the disproportionate
burden it will put on small businesses. Amazon can afford to pay a
small army to hassle with states who claim that Amazon isn't paying
enough tax. Mom's Cupcake Bakery and Cable Store cannot.
The
really interesting story of this whole case is Amazon's shift from a
staunch foe of taxing the internet, to one of its biggest boosters. A
few years back, Amazon was waging a scorched-earth campaign against
states that attempted to collect sales taxes from internet businesses.
For example, when various states passed laws claiming that affiliate
links represented a physical nexus in those states that would allow them
to collect taxes, Amazon said they were closing down associates who were residents of those states.
Both
the states and Amazon clearly believed that freedom from sales tax
constituted a major competitive advantage for Amazon. Yet a few years
later, they're all sunshine and smiles when it comes to taxing the
internet. In fact, they're lobbying for it. Why the shift?
Because,
whatever the history, Amazon's competitive advantage no longer derives
from its tax-free status. Amazon is the cost leader on most products
even before you add in sales tax. They're a marketplace killer because
their giant warehouses are vastly more efficient than even a big box
store. They require fewer staff per customer, and they don't have to be
decorated nicely. They can be located in the middle of nowhere,
instead of prime shopping mall real estate. (Bonus: wages in the middle
of nowhere tend to be lower than in dense urban areas). And you don't
have to air condition them to the point where an Emperor Penguin could
happily summer in the cell phone section. (Though at one point Amazon
seems to have decided that you didn't need to air condition them at all,
which was a problem. They've since upgraded their warehouses with more creature comforts).
Amazon
doesn't need to be salestax free to compete with brick-and-mortar
resellers; it needs volume, which it has, and convenience, where it lags
slightly behind the big boxes. The solution is to open more warehouses
closer to the customers. Next day and same day delivery will
increasingly become the norm, especially in urban areas. But to pull
more business from bricks-and-mortar, Amazon warehouses will become a
little big more like big box stores: nearer and more numerous.
Those
warehouses indisputably are a physical nexus. A taxable physical
nexus. In other words, getting closer to the customers means . . .
paying sales tax in more states.
If you
have to pay tax anyway, shouldn't everyone else have to, as well? An
argument that Amazon saw as unreasonable five years ago, when it came
from bricks and mortar stores, comes to seem eminently sensible when
it's you fighting off competition from smaller shops. Amazon
has reportedly poured millions into lobbying for this bill. Small
wonder it's poised to pass the Senate; smaller etailers don't have
nearly the lobbying muscle, and they certainly don't have a chorus of
governors urging their Senators to the state government out in these
troubling fiscal times.
For all the complaints, this is not actually going to raise that much money. Supporters of the bill claim
that it will raise about $23 billion a year; opponents say it's more
like $3 billion. But even the higher number is about 0.1% of total state and local spending for 2012.
Internet retailing seems like a huge deal to folks in the media, who
are much more likely than average to order a huge fraction of their
purchases online. The overwhelming majority of taxable sales are local,
however, and will be for the foreseeable future. We spend most of our
annual budget on groceries and restaurant meals and movie tickets and
similar things that can't really be shipped.
So
the interesting story here is not the budget question, but the business
question: what does this tell us about the future of the marketplace?
The answer is that it's going to be big: Amazon, not eBay sellers. The
jewelers and other small retailers who wrote to me complaining that
they couldn't compete unless Amazon was forced to charge sales tax are
going to be sorely disappionted; they'll never be cost competitive with
Amazon no matter what they do. The internet sales tax isn't going to
level the playing field between Amazon and local retailers. It's just
going to move Amazon closer to the end zone.
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