When companies get subsidies from state and local governments, it usually means that they have to pay less in taxes. Internet retailing behemoth Amazon.com built its business on making sure it could avoid collecting sales taxes from many of its customers, thus allowing it to undercut its brick and mortar rivals.
It now looks like that indirect subsidy is finally coming to an end. Congress seems poised to pass legislation that would require all online merchants with $1 million or more in revenue (Amazon’s annual sales are 60,000 times larger at $61 billion) to collect state and municipal sales taxes from customers anywhere in the country. This will be a godsend to struggling governments that need the revenue to pay for education, healthcare and other vital services.
Amazon has already come to terms with this policy change and in fact has been taking steps to exploit it. As has been widely reported, Amazon recognizes that the next stage in internet retailing is same-day delivery, at least in selected areas. To make that service possible, Amazon needs to greatly expand its network of huge distribution centers from which all those Kindles and toys and kitchen gadgets can be quickly transported to impatient customers. The company just reported a 37 percent drop in its first quarter profits that has been attributed in part to the cost of expanding that distribution network.
Don’t shed any tears for Amazon. That drop is probably just a blip. The company has already taken steps to radically reduce the cost of building those new facilities.
It has done this by using its sales tax collection practices as leverage in negotiating with state governments. For several years, the company negotiated special exemptions from the requirement to collect taxes in those states where it had a physical presence such as a warehouse. In some states, such as South Carolina in 2011, it used the promise of job creation linked to new distribution centers as bait to get the exemptions.
When necessary, the company also tried to use those promises to evade obligations to make good on judgments concerning uncollected past taxes. For example, last year the company reached a deal with Texas that allowed it to skate on a $269 million assessment for uncollected taxes. In exchange, the company agreed to invest $200 million on facilities it would have had to build anyway.
The company is also shifting its demands to traditional economic development subsidies such as income tax credits, property tax abatements and cash grants. For example, the company got a $7.5 million state grant and a $1 million local abatement for a distribution center it agreed to build in Delaware, and it agreed to build two such facilities in New Jersey on the condition that it receive a subsidy package, the value of which has not yet been announced
Amazon has also received a $2 million tax credit and up to $300,000 in training grants from the Indiana Economic Development Corporation for a fulfillment center it agreed to build in Jeffersonville. That agency — whose website lures companies with the pitch “Looking for a right-to-work state with all the right resources, business incentives, low corporate tax rates and AAA credit rating in place to reach your full potential? – is in tune with Amazon’s sensibilities. For in addition to seeking financial assistance, Amazon takes advantage of the implicit subsidy created by weak labor laws.
The fact that its U.S. operations have remained entirely non-union has made it easier for the company to impose inhuman working conditions in its facilities, which have been the target of criticism by groups such as Working Washington. The controversy has also emerged at Amazon’s operations in Germany, where the company was accused of using neo-Nazi thugs to intimidate immigrant workers at the facilities.
Amazon, it appears, will stop at nothing in its quest to dominate online commerce.