Internet sales tax is coming too late for some stores

By David Streitfeld  /  NY Times News Service, NEW YORK

Sun, Apr 28, 2013 - Page 14

Anita Demetropoulos, a Maine shopkeeper, figured she would never see the day when her biggset competitor, Amazon, would be forced to collect sales tax.

Now that the US Congress seems ready to do that, she is no longer sure it matters. Even in losing, the e-commerce powerhouse is triumphant. It no longer needs the tax break to vanquish its foes — and could even make money by collecting the new taxes for other retailers.

“I’m surprised and glad this is happening, but Amazon won’t rest until it gobbles up everyone and everything,” said Demetropoulos, who owns three toy stores with her husband.

The US Senate is poised to pass a bill to require all but the smallest online sellers to collect the tax. The House appears likely to follow suit. Although Amazon’s desire to avoid the tax played a fundamental role in its founding and growth, it is a supporter of the legislation.

As it builds new warehouses and extends its already considerable reach, Amazon is relying less on price than speedy delivery, free shipping and a selection that encompasses just about everything. Small retailers say Amazon was always a significant opponent, and is now a fearsome one.

“It’s beyond frustrating that Congress waited until Amazon became so dominant that having a massive tax advantage is no longer essential to its strategy,” said Stacy Mitchell, a senior researcher with the Institute for Local Self-Reliance. “The right time to fix this was a decade ago, when it could have saved many local businesses.”

Analysts who closely follow the fortunes of Amazon say collecting taxes is unlikely to drive away its customers. They say it may even help the Seattle company, while simultaneously defusing a potent political issue.

In the few states where the company has already begun collecting, sales dipped for about a year, Piper Jaffray analyst Gene Munster said, “then the customers come back for the convenience and selection,” he said.

Figuring out the tax in thousands of jurisdictions could be a logistical nightmare for merchants just above the legislation’s threshold of US$1 million in annual revenue. That is another place where Amazon is expected to benefit; it could sell tax collection services to tens of thousands of third parties.

For some store owners, the digital world’s momentum can seem overpowering.

Demetropoulos tried to sell specialty toys online, but business dwindled as Amazon sought out her competitors and signed them up to sell through its Web site. The company courted her as well.

“I’m like, ‘Are you kidding?’” she said.

She said customers come into one of the branches of Island Treasure Toys, scan a toy on their smartphone, inform the sales clerk that Amazon sells it cheaper and ask if the store would be willing to make a deal.

The tax will not help this situation much, which is regularly played out in all kinds of stores across the country.

If retailers say no, Amazon often gets the business.

Amazon reported this week that first-quarter sales rose 22 percent to US$16.07 billion, an amazing increase for a retailer of its size.

“This is the moment when Internet commerce was finally forced to stand on its own two feet,” said Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities who wrote the definitive report on Amazon’s long-held intransigence on the issue. “But it’s coming very late in the game.”

Under the current system, an Internet company has to collect taxes only in states where it has a physical location. For most companies, that means the state in which it has its headquarters.

When Jeff Bezos had the idea for Amazon in the mid-1990s, he explored setting up shop on a tax-free Indian reservation. Foiled in that goal, Bezos chose the state of Washington, which had an abundance of software programmers, but a relatively small population.

“It made no sense for us to be in California or New York,” he said in an unguarded 1996 interview.

For years, Amazon rejected the notion that it should collect money in states where it had no employees. Consumers are supposed to add up their Internet purchases and pay the appropriate tax directly to their state revenue collectors. In practice, however, few do, and enforcement is minimal.

In recent years, states struggling in the recession became more aggressive toward Amazon. Texas, New York and California all pursued the company over the tax issue. Amazon began making deals to collect the tax, while simultaneously building warehouses that would bring it closer to its customers, bringing same-day delivery within reach.

Andy Ross, the former owner of Cody’s, the famous Berkeley bookstore that went out of business in 2008, sees “a little irony” in these developments.

“As always, Amazon is nimble enough to make lemons out of lemonade,” said Ross, who was regularly outraged by the tax issue when he was competing against the e-commerce company. “But there is no question that the free ride it received for 18 years on the sales tax issue gave it a huge competitive advantage.”

In August, an Amazon executive testified before Congress that all “sellers should compete on a level playing field” and that the states really needed the tax money, which was estimated to be more than US$10 billion annually.

When the Senate introduced the legislation in February, Amazon wrote to the sponsoring senators to thank them.

Amazon chief financial officer Thomas Szkutak dismissed any ill effect from legislation, telling reporters this week that “certainly we’ll continue to have a good business in those states.”