[R-G] [BillTottenWeblog] The Success of Amazon

[Bill Totten]

Welfare As We Should Know It

by Dean Baker

CommonDreams.org (October 30 2007)


Last week, the business press reported Amazon.com had record
third-quarter profits as its stock price approached dot.com bubble
peaks. We should all be joining in the celebration of Amazon's success
because, as taxpayers, we deserve most of the credit.

The business press has written numerous stories explaining how Jeff
Bezos, Amazon's founder and CEO, is a truly brilliant businessman. This
may well be true, but the secret of his success is not in the futuristic
world of the Internet, rather it's in the old-fashioned world of tax
avoidance. The key to Amazon's profits is its customers do not have to
pay sales taxes on their purchases. In effect, Amazon has been allowed
to set itself up as a virtual tax-free shopping zone.

The point here is simple: if someone goes to their neighborhood book
store, clothes store, toy store, or even Wal-Mart (Amazon sells just
about everything these days), they generally have to pay sales tax on
whatever they buy. In some states, the sales tax can be higher than
eight percent, costing a family $16 or more on a $200 purchase

But not at Amazon: operating in the 21st century Internet, Amazon
shoppers can purchase their products without paying state sales tax
(unless you are unlucky enough to live in one of the four states where
Amazon has a physical presence). As a result of a loophole in the law,
Amazon is not required to collect sales tax on its sales. Amazon
effectively splits this tax bonanza with its customers, giving them an
incentive to keep coming back.

To see how important the tax subsidy is, Amazon earned just under $400
million in profits last year, which is approximately equal to three
percent of its $13 billion in sales. If we assume an average state sales
tax of four percent on purchases, Amazon's tax subsidy exceeded Amazon's
profits.

While Amazon and its customers can both be happy about this situation,
this is not a classic win-win story. The sales diverted to Amazon and
other Internet retailers came at the expense of old-fashioned brick and
mortar retailers who haven't mastered the 21st century skill of tax
avoidance. These old-timers are losing business and profits because of
Amazon's tax subsidy.

State and local governments are also losing tax revenue. This means
these governments must either cut back services provided to their
residents or they must raise other taxes. Of course buying goods over
the Internet does not reduce the demand for services from state and
local governments. So, when politicians promise not to tax the Internet
they are in effect promising to have higher taxes on items other than
Internet purchases.

The fact that so many politicians are so anxious to pledge to raise
taxes on non-Internet purchases probably reflects the fact Internet
shoppers tend to be relatively more affluent and, therefore, more likely
to contribute money to political campaigns than people who don't shop on
the Internet. Candidates are always happy to help such people with a few
bucks off their Internet purchases, even if it means the people who shop
at Wal-Mart pay more.

Amazon and other Internet retailers also feature prominently in this
story. They have not been shy about using their political power to
ensure their tax subsidy remains in place as long as possible.

At the moment, there is little political momentum to take away Amazon's
tax subsidy. The businesses that suffer from the subsidized competition
are either too disorganized to do much, or have more pressing problems
to deal with, such as paying for health care for their workers. The
general public has been kept largely uninformed on the issue because the
news media generally opt not to report on subsidies to major businesses
and relatively affluent customers.

So, if you can get to the web to do your shopping, you should appreciate
the fact you don't have to pay sales tax like Wal-Mart shoppers. And,
you should take pride your tax subsidies have allowed Amazon to be a
major international retailer. Jeff Bezos couldn't have done it without us.

Dean Baker is the co-director of the Center for Economic and Policy
Research (CEPR): http://www.cepr.net/

He is the author of The Conservative Nanny State: How the Wealthy Use
the Government to Stay Rich and Get Richer: www.conservativenannystate.org

He also has a blog, "Beat the Press", where he discusses the media's
coverage of economic issues. You can find it at the American Prospect's
web site: http://www.prospect.org/deanbaker

http://www.commondreams.org/archive/2007/10/30/4896/


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