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Amazon’s Unfair Advantage

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In 2013, Internet retailer Amazon made $74.45 billion (that’s billion with a ‘b’, folks) in revenue. While that pales in comparison to Walmart’s astonishing $473.1 billion, it’s right in line with other major retailers, such as Target ($73.3B in 2013). All three of these companies sell a lot of merchandise and make a lot of money, but one of these things is not like the other. And while Walmart might be an obvious choice due to its big numbers, the real outlier here is Amazon.

While companies such as Walmart and Target have online websites where customers can shop for the same products found in stores (and often, products that aren’t even found in stores as well), Amazon conducts its business entirely online. This gives it a unique pricing advantage against its competitors: Amazon’s sales aren’t subject to sales tax.

No Taxation Without (Physical) Representation?

Normally, when you go to a brick-and-mortar store, the prices you see on the label are pre-tax, and when you go to check out, you’ll pay as much as 12% in state and local sales tax on top of the listed price. Even if you buy online from these businesses, as long as they have a physical store in your state (even if it’s nowhere near you), you’re stuck paying the tax.

But Amazon has no brick-and-mortar stores at all. And as a result, it is able to skirt these sales tax laws. Well, mostly.

Unsurprisingly, tax laws are confusing, and there are enough rules and loopholes to drive a normal person mad. But a key factor here is the so-called Nexus, which extends the same idea to a broader sense of “sufficient physical presence.” This means that even if there is no physical store, a warehouse or office or any similar temporary or permanent presence of people or property associated with the business can also qualify that company’s sales to be taxed.

In Amazon’s case, that means that 23 states (AZ, CA, CT, FL, GA, IN, KS, KY, MA, MD, MN, NC, ND, NJ, NV, NY, PA, TN, TX, VA, WA, WI, WV) do charge sales tax on purchases. Excluding states that have no sales tax, there still remain 22 other states that would collect tax from Amazon, but are unable to.

Arguably, since Amazon holds no physical presence in those states, they really shouldn’t be taxed. Sure they use the roads and highways, but delivery is handled by UPS, FedEx, or USPS, so that’s really their territory. They certainly aren’t using any utilities or other infrastructure in the state, so it would seem reasonable that Amazon remains untaxed. The company itself is of course in favor of this notion, and has historically fought hard to resist attempts to uniformly tax Internet sales.

But this question takes on a different flavor when we try to ask the question, “what exactly is the Internet?” or, more relevant to this discussion, “where is the Internet?”

The Internet Is Everywhere

The Internet isn’t really a single entity that you can point to and say, “here it is!” Websites are housed on servers, which certainly have physical locations, but every time someone accesses a site, data has to be transferred through Internet Service Providers (ISP) over existing broadband infrastructure. The Internet exists in every computer, tablet, and smartphone connected to the Web. So if data is a physical thing, stored as a series of zeroes and ones on data drives, doesn’t Amazon really have a physical presence…everywhere?

Or, perhaps, with the emerging ideas behind cryptocurrency and decentralization, maybe the Internet is, in a way, its own entity altogether: a foreign country of sorts. In that case, the government could easily charge an import tax on sales, though there would certainly be some legal trickery that would require clearing up. Perhaps we could establish a free trade agreement with the Internet, but who would really represent the Internet anyway?

An additional conundrum that could arise with all of this is with companies like Walmart and Target, who hold both an online and a physical presence. Would the online sites be treated by Amazon’s rules in this case? Could online sales from these companies also be tax-free? This could have a terrible consequence of encouraging these big businesses to close up stores in favor of a heavier online focus that allows them to stay competitive price-wise. And amidst all of this, what happens for sites like eBay, which are simply facilitating sales rather than selling anything themselves?

Much Left to Sort Out

This is clearly a confusing situation, but it’s also clear that something needs to be done. Already 24 states (including SC, who will start taxing Amazon sales in 2016) agree. Right now Amazon and other Internet retailers hold a competitive advantage over other retailers. And while no one likes the idea of adding more taxes, the government has an obligation to keep the playing field level. Besides, let’s not act like the bigwig lawyers these companies have aren’t already working on new loopholes, anyway.

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