Due to its expanded distribution network and fulfillment centers to ensure quick delivery, Amazon has a physical presence in many states and an obligation to pay sales taxes. Amazon currently collects and remits sales taxes for sales made directly by Amazon, as opposed to its third-party sellers, to all forty-five states with a statewide sales tax. Amazon supports the Marketplace Fairness Act that requires remote sellers to collect sales taxes.
The U.S. Supreme Court is deliberating the South Dakota v. Wayfair Inc. case. The case examines the constitutionality of a South Dakota statute that imposes an economic nexus standard to affix the right to impose sales tax collection requirements on remote sellers. Under the rule, sales tax nexus exists if a seller has sales within the state that exceed $100,000 or more than 199 transactions to state residents.
A decision by the Supreme Court supporting economic nexus would allow states to impose sales tax collection on sellers without physical presence, including Amazon’s third-party sellers.
If Supreme Court does not allow the economic nexus standard, thus reverting to the physical presence standard, states will likely continue to implement notice and report laws, such as those recently enacted in Rhode Island. Such rules will likely result in more sellers to voluntarily collect and remit sales taxes.
Regardless of the Wayfair case’s outcome, more online retailers will likely collect sales taxes and this actually puts Amazon in a position to win. Given the large number of jurisdictions, various tax rates, and differing definitions of items subject to tax, sales tax compliance costs can be substantial.
Amazon offers its third-party sellers an optional sales tax collection service for a 2.9 percent fee (based on the collected sales taxes). To the extent existing third-part sellers purchase the sales tax service, Amazon benefits.
Retailers who are not currently selling through Amazon might find that the sales tax collection option a salient enough upgrade to become a third-party seller. Amazon’s revenues from third-party fees will continue to grow and become more important to Amazon’s bottom line.
Third-party seller fees were $32 billion in 2017 and accounted for 17 percent of Amazon’s net sales. The year-over-year growth in third-party fees was 38 percent, which more than doubled that from Amazon’s online stores. The expansion of sales tax collection requirements will likely fuel more growth.
Amazon also benefits to the extent the expanded sales tax requirements makes the final purchase price for items sold by third-party sellers, or from other online sellers, closer to the price directly from Amazon since both are subject to sales tax. Amazon benefits because some sales currently made through Amazon’s third-party sellers, or from other websites, may shift to direct from Amazon.
The imposition of sales tax on remote sellers, including Amazon’s third-party sellers, might help in-state retailers by leveling the playing field with online competitors. However, the expansion of sales taxes to remote sellers will benefit Amazon.
Amazon has already capitalized on the sales tax advantage it had during its start-up phase. Amazon’s low-cost sales tax collection system, coupled with Amazon’s extensive and efficient fulfillment and distribution networks, give Amazon such a large cost advantage that it becomes, or reinforces its position as the pre-eminent online retail platform.
If President Trump desires to slow down the perceived damage Amazon is causing, trying to impose sales taxes will not cut it. He will have to look for another way to curb Bezos and his internet Goliath.
Commentary by Jim Seida, associate professor, Mendoza College of Business at the University of Notre Dame. Seida investigates how tax and non-tax considerations affect decisions by individuals and firms. He has published in The Accounting Review, Journal of Accounting and Economics, The Journal of the American Taxation Association, National Tax Journal, Tax Notes, and Issues in Accounting Education.
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