How Amazon.com undersells Best Buy, the Apple store, and almost everybody else.

Commentary about business and finance.
Nov. 19 2010 4:56 PM

Every Day's a Tax Holiday

How Amazon.com undersells Best Buy, the Apple store, and almost everybody else.

Illustration by Rob Donnelly. Click image to expand.

Apple's new 11-inch MacBook Air has a list price of $999 —that's what you'll pay at Apple.com and the Apple store, as well as at Best Buy and other large retailers. At Amazon.com, though, the same model sells at a slightly lower price— $979. That difference seems relatively insignificant until you go through the checkout process. At Apple's Web site, the final tally for a $999 MacBook is $1,101. That's the price at Best Buy, too. But at Amazon, the final price is the same as what's listed on the product page: $979. In other words, the MacBook is more than $100 cheaper at Amazon. Why? Sales tax, of course.

Unless you live in Kansas, Kentucky, New York, North Dakota, or Washington state, you'll pay no sales tax on many purchases from Amazon. (There are exceptions for goods that other merchants, like Target and Dow Jones, sell through Amazon.) This gives Amazon a huge—and largely hidden—price advantage over most other national retailers. You'll get an especially good deal at Amazon if you're making big purchases and you live in an area with high taxes. In Chicago and Los Angeles, for instance, state and local taxes add up to 9.75 percent, the highest in the nation. Sales tax is 9.5 percent in San Francisco, 9 percent in New Orleans, and it's above 8 percent in Houston, Dallas, Las Vegas, Philadelphia, and Atlanta. In those areas, a 55-inch Sony Bravia TV that sells for $1,394 at both Wal-Mart and Amazon will cost you at least $111 less at Amazon. The 64-gigabyte iPod Touch, which sells for $399 at Apple, $395 at Target, $387.99 at Best Buy, and $382.54 at Wal-Mart is cheapest of all at Amazon—$382.54, without the $30 you'd pay in taxes at other stores. The same advantage applies to a range of products. The general rule: If you're choosing between Amazon and any other large national retailer, you'll almost always get a better deal at Amazon because of tax savings.

(Disclosure: Slate participates in Amazon Associates, an "affiliate" advertising plan that rewards Web sites for sending customers to the online store. This means that if you click on an Amazon link from Slate—including a link in this story—and you end up buying something, Amazon will send Slate a percentage of your final purchase price.)

Why doesn't Amazon charge you sales tax? It has to do with the regulations states use to determine which companies must collect taxes. According to Quill Corp. v. North Dakota, a 1992 Supreme Court ruling, companies are only required to collect sales taxes from their customers when they have a presence in the state in which they reside. If you buy something from the Web site of a company that has physical stores nearby, you'll most likely have to pay taxes. When you shop at online-only stores, you pay tax only if the store has substantial operations in your state. Since Amazon's headquarters are in Seattle, you have to pay taxes if you live in Washington State, and because it has warehouses or other facilities in Kentucky, Kansas, and North Dakota, you've got to pay taxes there, too.

Sales tax is a touchy subject for Amazon. Local retailers have long protested that online stores' tax-free status gives them an unfair price advantage. Amazon, wary of provoking state or federal authorities, has played down this advantage. It doesn't tout tax savings anywhere on its site or in other marketing efforts. In a brilliant report on Amazon's tax strategy, Michael Mazerov of the Center on Budget and Policy Priorities points out that company representatives have long argued that Amazon's tax advantage is not a big deal. "People shop online for convenience, for huge selection and great prices, and not because of any sales tax issue," a spokesman said in 1999. And an executive once told a group of state tax administrators that "we don't consider tax as a competitive advantage." (The company didn't respond to my inquiries about its tax policies.)

But Mazerov argues that Amazon's actions suggest that taxes have always been a primary consideration. Jeff Bezos, Amazon's founder, moved from New York to Seattle to start the company. "We could have started Amazon.com anywhere," he toldFast Company in 1996. "We chose Seattle because it met a rigorous set of criteria." Among other things, Seattle had lots of talented tech people, it was a nice enough place to attract many more smart people, and it was close to a big book warehouse.

This was true of the San Francisco area, too, which Bezos had also considered for Amazon's headquarters. But Bezos saw one major problem with San Francisco—it's in a big state with high taxes, meaning lots of customers would be subject to sales tax if they bought stuff from Amazon. "I even investigated whether we could set up Amazon.com on an Indian reservation near San Francisco," Bezos told Fast Company. "This way we could have access to talent without all the tax consequences. Unfortunately, the government thought of that first."

Amazon has aggressively fought state efforts to impose sales tax on its operations. In 2008, New York passed a law that required online companies to collect taxes if they had deals with marketing affiliates based in the state. The law was designed specifically to target Amazon and other large online retailers—many called it the "Amazon tax." In response, Amazon sued New York over the law's constitutionality—marketing affiliates, Amazon argued, did not constitute a significant presence in the state. (Overstock.com, another company that has carefully avoided collecting taxes, took a harder line. In response to the New York law, Overstock canceled its relationships with all New York affiliates, freeing it from collecting any taxes in the state.)

While Amazon is still fighting the New York tax law, the company has been collecting taxes in the state as per the legislation. But Amazon has pushed back against collecting taxes in three other states that passed similar laws—it told its marketing affiliates in Colorado, North Carolina, and Rhode Island to take a hike, allowing the company to skirt tax collection there. And it has threatened to do the same in other states—including California—where legislators have proposed affiliate-related taxes.

So, is Amazon's tax-free status unfair? Of course it is. As Mazerov points out, Amazon has physical operations in 17 states in which the company and its employees enjoy the fruits of local taxes—police and fire protection, roads, hospitals, and other infrastructure that make its operations possible. Yet Amazon skirts tax collection in most of these places through clever legal tricks. For instance, it has incorporated its warehouses and Web site as separate legal entities in order to argue that it doesn't really have a presence in Nevada, Texas, and other states. The Kindle offers another example of that strategy—the e-book reader was developed at Lab126, an Amazon office based in Cupertino, Calif. But that office is actually a legal subsidiary, freeing Amazon of collecting any taxes in California.

One note of warning for online shoppers: Even if Amazon doesn't collect taxes from you at the point of purchase, you're still likely responsible for paying taxes on your items. That's because most states impose a "use tax" on goods purchased from out-of-state retailers. Technically, then, if I buy a $1,000 laptop from Amazon, I'm supposed to pay a $90 use tax when I file my taxes to my home state of California at the end of the year. I've never done this, and I bet you haven't either—almost nobody does, because states have no good way to enforce use tax collection.

Given the obvious unfairness of Amazon's tax status—and given the clear loss in revenue for cities, counties, and states—you might wonder whether it is in some sense unethical to shop at Amazon. Is it your civic duty to buy from stores that collect sales taxes even if you'll get a better deal from Amazon?

No way! Sure, Amazon's tax status is unfair, but that's the law. As long as you're doing nothing illegal—remember to report your purchases at the end of the year … wink, wink—you've got every right to seek out the best deal you can get. That, after all, is the American way.

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