Amazon Not Slowed By Sales Taxes
It’s long been argued by retailers operating stores in states where Amazon.com doesn’t collect sales taxes that the e-tailing giant has an unfair advantage because consumers can see that with them they can save perhaps six or seven percent. But a funny thing has happened as more states work out deals for Amazon to collect sales taxes — the company continues to grow.
Now, it’s clear that Amazon recognizes that the company holds an advantage in places where it doesn’t collect taxes. It certainly helps explain why Amazon has repeatedly made deals with states to open distribution centers in exchange for putting off the date when it begins to collect taxes.
The most recent example is in Massachusetts where Amazon has reached agreement with the Commonwealth to add jobs and then collect taxes. This is true even though, as an Internet Retailer article points out, Amazon already has physical operations in Massachusetts (and therefore should be collecting sales tax) with Kiva, a company that manufactures robots for warehouse operations.
Amazon, according to The Wall Street Journal, currently collects sales taxes in eight states with plans to begin collecting in New Jersey and Virginia in addition to Massachusetts next year. It has also reached deals to begin collecting sales taxes in Indiana, Nevada, South Carolina and Tennessee in coming years.
Discussion Questions
Why does Amazon continue to prosper in states after it begins collecting sales taxes? Do you think retailers in states who clamored for a level playing field are now benefiting as a result of Amazon collecting sales tax?
It’s a good trade-off for Amazon. They agree to collect sales tax in exchange for opening distribution centers in the state so they can eventually offer next-day delivery. While it loses the “no sales tax” advantage, it lessens the store’s immediate gratification advantage.
By not charging sales tax in the early years, Amazon was instantly competitive while it smoothed out supply chain and customer experience issues. Now it can differentiate itself without the “no sales tax” advantage.
You can find most anything on Amazon, generally cheaper than at most brick and mortar stores. Parking, crowds, out-of-stocks or items not carried, and general hassles in big stores serve as a serious deterrent when it comes to many items. Many busy people don’t want to spend time on all that, and don’t mind waiting a few days for items if it means not having to get in the car and go shopping.
Amazon might have been that much more competitive on price without collecting sales tax, but they are still among the most dominant, customer-centric retailers in the world today. Sales tax will not change their value proposition significantly and we’re seeing that in the results.
Amazon is a great business model, and the convenience factor is second to none. The marriage between Amazon and the thousands of small businesses willing to give them a small commission for the sale is outstanding for both parties. Free shipping, and a quick turnaround makes Amazon the best at what they do. They are the the king of the internet.
David makes a valid point about Amazon’s ability to “trade off” between sales tax collection and building a stronger infrastructure. But the sales tax differential was never the “sustainable advantage” for Amazon in the first place. It started with competitive prices, broad assortments and great execution—and Amazon has only gotten stronger as its reach grows into other businesses.
Amazon (and others) have enjoyed a huge grace period, scaling and building a loyal base before the tax issue came to the fore. Now, they have a reputation for both good service and good prices among a huge consumer following that has been conditioned to change their traditional buying habits. My guess is that the majority of those people will grin and bear it and stick with Amazon.
Remember, the tax “penalty” only appears after putting time and effort into product evaluation/selection at the end of the shopping cycle, where most people are ready to settle their shopping and move on. They won’t consider sales tax at the beginning of their online shopping journey any more than people consider tax when they look over weekly sales flyers for b&m stores.
Amazon is so successful at what they do that collecting sales tax at this stage of their development will not be a deterrent in any way. The convenience of online shopping made easier by their model has to make giants like Walmart take serious notice.
Because the fundamental consumer benefit of the Amazon business model is not avoiding sales taxes. That is, and always has been, a red herring thrown out by brick and mortar retailers to explain their inability to compete.
The fundamental consumer benefits are ease of shopping and choice. Add in outstanding customer service and you have a winner—doesn’t matter if it is bricks or clicks.
Amazon has done a great job with marketing and in some respects has defined how internet marketing should be done for internet retail sites. Amazon has turned strong marketing and a price advantage into a formidable business. However, the price advantage is not just on taxes. Without brick and mortar, Amazon keeps their overhead low and passes that on to the consumer. As a consumer, I think of Amazon as the price to beat.
However, many stores will now price match Amazon and the ability to have a product right now cannot be beat. This has been driving an interesting behavior in me, shopping on Amazon to determine the product I want (reading reviews, comparing prices, etc.) then taking the final product with pricing to a local retailer. It will be interesting to see if this reverse showrooming will catch on.
Given the strengths of Amazon’s business model—breadth of assortment, ease of shopping, and the continuously shrinking delivery cycle—the company has built tremendous loyalty among its core customer. The addition of sales tax to the cost structure is a minor hit, but hardly enough to move customers elsewhere. Retailers who thought this would “level the playing field” don’t really understand the situation.
I don’t shop Amazon because of the absence of state taxes; nor do the prices influence my decision to buy there. In fact, I’m one of those people who keep up with the receipts and purchases and list it on my income tax return. I shop there because of the convenience of finding practically anything I want without the hassle of having to shop in a big box brick & mortar store and having it delivered directly to my front door.
The answer is simple: Amazon.com provides an excellent customer experience. Regardless of the tax, which the consumer would pay anyway if they bought local, there is selection and convenience. If the competition wants to level the playing field, they will have to do more than competing on sales tax issues. They will have to create selection and offer the same convenient experience that Amazon.com offers its customers.
Amazon’s price advantage on many items, even with the sales tax included, beats retail stores.
I was in the market for a new printer and compared prices with a big box electronics store. There was a $100 difference in price, favorable to Amazon, so even if there had been sales tax I would have come out significantly ahead. And, it was convenient and arrived in two days.
Plus, I have found many relevant purchases through the recommendation engine on Amazon. Amazon is just plain good at what they do!
I am of he opinion that Amazon will select very carefully where they place their distribution centers. The states with the most business and certainly those with the most growth potential will see little chance for a distribution center. In the states with no sales tax, you might see the biggest buildings going up. But that’s just what I think.
No sales tax hasn’t been Amazon’s only draw. Convenience, selection, a friction-less experience and the genius Amazon Prime program make it a very attractive shopping option.
Once it’s able to offer same-day delivery, Amazon will be even more popular than it already is.
What’s fascinating about this is that the pressure to differentiate themselves is causing exciting changes in physical retail stores.
Sales tax is an easy talking point; everybody gets fairness. Now local retailers must address the bigger issues. Customer service at Amazon is flawless, in large part because humans aren’t involved.
Amazon has been most successful in categories where a relationship with a salesperson is least likely. But, all categories are at risk. Retailers must know that their employees are either their most compelling asset or greatest liability. Beware of the latter.
Charging sales tax or not charging sales tax is irrelevant if the local retailer doesn’t serve their client.
While the tax thing has been a plus for Amazon, it was not what made Amazon the great retailer that they are. Amazon has given us good prices, great service and convenience that meets expectations! ‘nuf said!
Customers who are buying at Amazon aren’t doing it to just save on sales tax! They do it because of selection, price and ease of shopping.
The addition of sales tax is NOT going to help the retailers who think that’s why they lose sales to Amazon.
Strictly speaking, the premise isn’t supported here; with only eight states in the fold, the tax effects really haven’t started. And the argument was never that sales tax was THE factor for their success, only that is was A factor (as everyone here notes); so the question really is, will their growth be only X% instead of X+1% (or whatever)? We’ll just have to wait until all—or at least many more—of the states are in effect, and then follow the conflicting views of analysts.
Broad selection and ease of shopping.
The cost-advantage due to skipping of local sales tax is a circumstantial benefit. Amazon’s business model of e-commerce might not have considered it as an advantage. Moreover, Amazon does not target cost-conscious, discount shoppers. The trendy, online shoppers are likely to be more concerned about satisfying their needs. Group Buying vendors like Groupon and LivingSocial, and Location-based Social Networks like FourSquare, thrive on discounts and promotions. Their business model is likely to be more influenced by additional cost.
Though, I do not agree to the observation that sales are increasing because of paying sales tax. Its effect might not be more, but there will be some customers who will be put off by the extra burden.
Amazon is all about Trust. With a capital T. The Amazon BUY button is the most trusted in the eCommerce universe. And they have gobs of social proof. When buyers visit Amazon, they do so with a credit card in hand.
As a manufacturer, we have had mixed results with Amazon. But once you get momentum, it’s hard to imagine the volume—the amount of total market share, Amazon represents.
Taxes? Hah! We have customers who prefer Amazon over our award-winning shopping cart. Even though Amazon orders cost the client more in shipping and handling.
Trust, easy checkout and social proof dwarf the tax issue.
The tax savings certainly had a significant impact on overall product pricing comparisons between Amazon and other retailers. However, the tax gap was only one part of the difference in price. With its scale and efficient operations, Amazon’s pre-tax price is often the lowest too. Price-sensitive consumers will generally purchase based on the overall price (product + shipping + tax), and to the extent that Amazon’s overall price is lower than that of other retailers, they will continue to buy from Amazon. The gap will certainly narrow by Amazon having to pay tax, and it will almost certainly swing some business to other retailers, but its operating efficiencies may still enable Amazon to be the lowest price option.
That said, it’s not only about the price. Shoppers are smart. They pick the best option for themselves, incorporating a number of different factors such as price, ability to see and touch the product, after-sales service, convenience of pickup or delivery, return policy, and so on. Retailers who add value for the customers at the right price will enhance their ability to compete and win.
For example, one of our staff recently purchased a new camera and found the price, shipping and tax to be the same at Amazon and Best Buy. Whereas the tax savings in the past may have encouraged her to choose Amazon, the all-in price was now the same, and she chose to purchase the camera from Best Buy because she finds their return policy to be more convenient. In fact, she said that she would have probably even been willing to pay a few extra dollars to have that convenience.
As such, the fact that Amazon now collects sales tax does level the playing field somewhat; however, retailers have always had the ability to compete with Amazon based on a sound market strategy, and good visibility into market pricing that enabled them to set the right price for their offering.