WASHINGTON—President Donald Trump has fired a warning shot at Amazon Inc. over the online retail giant’s practices that are driving thousands of retailers out of business as the company increases its competitive advantage through loopholes.
Chief among those loopholes was Amazon’s failure in the past to collect state sales taxes. Amazon’s record on this issue has improved; it now collects the taxes in all 45 states that have state sales taxes. However, it is collecting them only on its direct sales and not on sales that third-party merchants make through the Amazon website.
Nearly half of items sold on Amazon are coming through third-party retailers, according to a CNBC report. These retailers can benefit from Amazon’s facilities and payment system, but they are not required to collect sales taxes.
“There’s no question that Amazon is capable of collecting these taxes,” said Carl Davis, research director at the Institute on Taxation and Economic Policy, a nonprofit research organization. “It’s just not doing so. And the result is a price advantage over other businesses.”
Some states have figured out a way to solve this problem. Washington and Pennsylvania passed legislation requiring online retailers to collect taxes on third-party transactions.
In Washington state, not only Amazon but also online stores like Wal-Mart and Etsy have agreed to collect these taxes. “Whether every state could do that or not remains to be seen,” said Davis.
Combined local and state sales tax rates range between 5 percent and 10 percent, depending on the state.
Shares of Amazon plunged following a report that Trump is set to go after it. Before the news came out, the tech stocks including Amazon had already been hit by growing fears of a regulatory clampdown following Facebook’s data scandal. And on top of all this, Trump lashed out at Amazon on Twitter.
Amazon shares slid nearly 12 percent in just one week, losing more than $85 billion in market value.
“I have stated my concerns with Amazon long before the Election,” Trump wrote in a tweet on March 29.
“Unlike others, they pay little or no taxes to state & local governments, use our Postal System as their Delivery Boy (causing tremendous loss to the U.S.), and are putting many thousands of retailers out of business!”
The White House rejected claims that the president’s criticism was part of a personal grudge against The Washington Post’s critical coverage of Trump. Press secretary Sarah Huckabee Sanders said on March 28 that the president is always looking to create a level playing field for all businesses, and the president’s treatment of Amazon is no different.
Tax Breaks and Subsidies
The competitive advantage Amazon gained by avoiding the collection of sales taxes in many U.S. states, along with subsidies from states, helped the company grow from a website that only sold books to become the world’s largest online retailer.
According to a 1992 U.S. Supreme Court ruling, online retailers can avoid collecting sales taxes if they don’t have a “physical presence,” like a store or distribution center, in that state.
To take advantage of this tax loophole, Amazon first located its distribution centers in states with a small population or no sales tax. This is one of the ways the company has kept its prices low compared to local retailers and brick-and-mortar stores such as Wal-Mart and Best Buy.
However, starting in 2011, Amazon made a significant change to its strategy. To provide rapid delivery service to its customers, it started building facilities across the country and started collecting state sales taxes, except for items sold on the “marketplace.”
Amazon is only one part of the problem, according to tax experts. Other e-commerce companies avoid collecting sales taxes as well.
The Supreme Court has recently agreed to hear a case that could overturn prior precedent, allowing state and local governments to collect billions in internet sales taxes.
“That decision could change the landscape quite a bit,” said Davis. After the ruling, which is expected by the end of June, “states will have more clarity on what is and is not allowed. So there’s a little bit of a wait and see approach going on.”
In addition to tax benefits, extracting economic development incentives, such as subsidies, has been a crucial part of Amazon’s expansion strategy for the last decade.
As Amazon grew, the company pushed states to allow it to build facilities without collecting sales taxes, and it even convinced many states to subsidize its expansion in return for creating jobs.
“Amazon is very actively seeking out tax incentives for warehouses, data centers, and now for its second headquarters as well, which is not entirely unusual,” Davis said. Almost all big corporations are doing that, he added.
Amazon has received public subsidies worth more than $1.4 billion for its facilities built in the United States since 2000, according to Good Jobs First, a nonprofit organization that tracks public subsidies.
Trump also accuses Amazon of using the post office as its “delivery boy,” claiming that Amazon is underpaying the U.S. Postal Service (USPS).
“While we are on the subject, it is reported that the U.S. Post Office will lose $1.50 on average for each package it delivers for Amazon. That amounts to Billions of Dollars,” he wrote in a Mar. 31 tweet.
“If the P.O. ‘increased its parcel rates, Amazon’s shipping costs would rise by $2.6 Billion.’ This Post Office scam must stop. Amazon must pay real costs (and taxes) now!”
Trump was referring to a Citigroup analysis published in April last year.
According to the Citigroup report, the irrational pricing keeps the USPS unprofitable, and “Amazon is benefitting from discounted rates and has greater flexibility in its system.”
If the shipping costs were fairly charged, the delivery cost per parcel would be $1.46 higher for Amazon and the “annual impact would be $2.6 billion in incremental costs on average,” stated the Citigroup report.
The U.S. Postal Service suffered a loss of $2.7 billion in 2017.
Trump also took aim at Bezos-owned The Washington Post, calling it a “lobbyist” and “fake.”
“The Failing N.Y. Times reports that ‘the size of the company’s lobbying staff has ballooned,’ and that … does not include the Fake Washington Post, which is used as a ‘lobbyist’ and should so REGISTER,” he stated in his March 31 tweet.
Sen. Bernie Sanders (I-Vt.) joined Trump in criticizing Amazon, saying that the company has gotten too big.
“What we are seeing all over this country is the decline in retail,” Sanders told CNN on April 1.
“We’re seeing this incredibly large company getting involved in almost every area of commerce. And I think it is important to take a look at the power and influence that Amazon has.”