Wednesday, April 24, 2013

A bottleneck Issue: Amazon’s change of strategy with supporting Tax Sale

I will be the first to admit that I don’t pay for my state sales tax when I purchase items on Amazon.  According to the tax rules if you live in a state with a sales tax, you are supposed to submit uncollected taxes on Internet purchases at the end of the year, even if the merchant doesn’t seek it at the time of the sale. Of course, nobody does that. I also have to admit that I have intentionally purchased and had most of my items delivered in Pennsylvania and I don’t end up paying the sales tax. I’m originally from California and now there is a state sales tax that is imposed on Amazon items. The California sales tax ranges from 7.25% to 9.75%, depending on where a buyer is resides.  I paid approximately $11 when I bought some items on Amazon and had those items delivered at my California address. The free ride ended in California on September 2012, and if legislation passes Amazon and Ebay will be collecting sales tax. 

Initially Amazon fought against this sales tax with their lobbyist on Capitol Hill. A little reminder on why Amazon was exempted from collecting sales taxes. In 1992, the Supreme Court’s ruling in Quill Corporation v. North Dakota allowed for Amazon to be exempted. In that case, Quill, a mail-order office equipment retailer, was sued over what North Dakota said was taxes due because Quill shipped products to the state. The court ruled that merchants did not have to collect taxes in a state unless they had a physical presence in the state. This covered mail-order businesses and, and in 1992, the then-nascent business of Internet retailing, which at this time Amazon didn’t even exist then.

Now with the legislation for an Online Sales Tax, Amazon is supporting something that they didn’t in the past. It is not convenient not to support this since they are improving and expanding their warehouse locations. The change of heart or strategy is not altruistic to help out the depleted state budgets.

There are a couple possible reasons. Like mentioned in the article Harvard Business Review article, Simple Rules for a Complex World, by Donald Sull and Kathleen M. Eisenhardt, a bottleneck existed with Amazon. This article mentions how leaders in companies can solve bottleneck problems in the complex world with the right strategy. BOTTLENECK: Amazon intentionally did not have huge warehouses in big states to avoid taxes, and did support online sales taxes. THE FIX: Now new strategy to expand in every state and have warehouses closer to metropolitan areas has Amazon supporting the legislation. Other reasons are the following:

Reason #1
It helps the big Amazon Company but it causes a burden to smaller online merchants. Collecting state and local sales tax all around the country would require a fair bit of effort on the part of online retailers, because sales tax rules vary from state to state. Not a big deal for Amazon because that's a good thing — it makes life harder for Amazon's smaller competitors.
Despite what they may say, big companies often like regulations, Amazon being one of them.

Reason #2
Under the current law, Internet retailers have to charge sales tax in states where they have a significant physical presence or huge warehouses like Amazon. For this reason, Amazon kept warehouses out of big states so it could avoid charging sales tax in those states.
Brick-and-mortar retailers didn't this was very nice, and so they started lobbying state governments to push for Amazon to charge sales tax. So the bottleneck was solved, Amazon changed its strategy. Amazon Company agreed to start paying sales tax in more states and has expanded; building huge warehouses near major metropolitan areas in those states.

Read More:

HBR ArticleSimple Rules for a Complex World, Donald Sull; Kathleen M. Eisenhardt

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