Q&A talks about Amazon and state sales tax issues with David Cadden, a professor in the Entrepreneurship and Strategy Department in the School of Business at Quinnipiac University in Hamden.
Q: Amazon has agreed to start collecting the sales and use tax from Connecticut consumers starting in November of this year. What’s in it for Amazon to do this? Why reach accommodation with the state?
A: I’m surprised, too. They have really been fighting for the last two years against this to the point Amazon was dropping affiliates who had facilities here. (State law makes websites with physical presences in Connecticut collect sales and use taxes.) Amazon may be planning a larger distribution network across the country. They may have gotten a good deal from the state. They might have gotten some tax breaks to do this. They were going to go with more distribution centers and maybe they could get more deals from states.
Q: What’s the impact for the state? Does it give it bargaining power with other large websites to collect sales taxes?
A: Often it was a union tactic that if you could get the largest company to fall into place, the others would. This is similar. It creates less of a case for the other websites to balk. What will probably happen is Amazon will come up with the software to figure out the appropriate sales taxes at all levels and for all products across the country … and if that becomes readily available to smaller operators, the cost won’t be as great to comply.
Q: Would Amazon have built in Connecticut without this agreement? Would that have compelled it to collect the taxes anyway because it had a physical presence in the state?
A: My understanding is if the company doesn’t have a physical presence in the state, the state has no arguments to tax it on the sale it has. In 2011, Amazon dropped some of their associates who had a physical presence in Connecticut. You can fight the state laws, but once it goes federal you will lose across the board. I think they know they’re going to lose at the federal level. Why not cut a deal and get something out of it?
Q: How does this move affect Amazon’s bottom line? Have Internet retailers avoided collecting the sales tax because of the additional accounting costs?
A: For a large company like Amazon, the cost of developing the software would be minimal but if I’m a boutique operator, it’s going to cost me a huge part of my profits. Some people love the thought of not paying any sales tax. Local retailers look a little bit better. Before, the consumer didn’t have to pay sales tax (at Amazon). Amazon plays a real long game. It doesn’t play for the quarterly results. They’re willing to forego immediate profit to strive for a long-term gain.
Q: What’s your opinion on this finally becoming federal law? Will Congress reach out and help states collect needed revenue?
A: I hadn’t thought it would occur before but when they say some states are really scratching for money and realize states can’t do it on a state-by-state basis, Congress could do it so the states can’t hit the federal government up. It will be part of an overall tax change. The fact retailers didn’t have to do it was a nice tax amnesty in the early days of the Internet. It let them build up their operations. Now Congress is getting enough heat from the “brick-and-mortar” retailers and the local states that they will act on it. It’s just the cost of doing business and the software.
Q: Does this help local merchants at all? Were people buying online just to avoid the sales tax?
A: Yes, I think it sometimes gave consumers a greater variety. There were some weird sites like Zappos, which sell shoes online. I didn’t think they would do well but they have. Some businesses will be kept alive a little bit longer. Others will go more of a hybrid route. Amazon is into everything online. I don’t think this is going to appreciably affect their long-term growth. What Amazon might do is if they’re having more of these regional customer fulfillment centers, beyond a certain level of spending you might get free shipping. If they have more regional centers, they won’t be eating that much costs in terms of shipping.
