Amazon's loathsome tax scheme: How behemoths defeat Main Street -- and how we can stop them

If Amazon had to pay its fair share of taxes, its bottom line would be squeezed. Finally, a level playing field

By Kathleen Sharp

Published July 12, 2014 6:30PM (EDT)

  (AP/Reed Saxon/<a href=''>spirit of america</a> via <a href=''>Shutterstock</a>/Salon)
(AP/Reed Saxon/spirit of america via Shutterstock/Salon)

A motley group of boomers and millennials recently filed into Scottish Rite Center on the shores of Lake Merritt in Oakland, California, to talk about economics. Dressed casually in denim, lace and cotton and sporting dreadlocks, bobs and buzz cuts, these small-business owners hailed from rural bergs, little towns and long-neglected urban cores from around the country. It’s safe to say that most of them were not members of Amazon Prime. Rather, they were true believers in the saving grace of local living economies. Assembled in this temple-like structure built by the Freemasons, they are convinced that the only way out of this Unending Recession is to adopt a model in which local business owners make up most of the local economy and drive that region’s wealth.

“We’re trying to nudge Wal-Mart and Amazon out of the picture so everyone else can make a little bit more money,” said a wag from Missoula, Montana.

As it is, Amazon is getting slapped by a great equalizing force — taxes — specifically retail sales taxes. For the past two decades, shoppers at Amazon and other online retailers haven’t had to pay retail sales taxes (also called consumption taxes), unlike the patrons of brick-and-mortar stores. This has been a huge advantage for Amazon and is why so many of your favorite bookstores went out of business, along with local toy stores, baby shops, beauty suppliers and other mom and pop operations.

But thanks largely to local economy advocates, some 22 states now require Amazon to collect sales taxes from shoppers. According to two recent studies, that change is hurting Amazon by squeezing its already thin profit margin of 1 percent and threatening to depress its stock price. The behemoth won’t report second quarter earnings until July 24. But we already know that it expects to report flat sales of $20 billion or so and another quarterly loss. Fund managers and investors would punish a brick-and-mortar retailer like J.C. Penney’s for not delivering solid profits. But Wall Street doesn’t mind a continuous run of annual losses from Amazon, headed by a former executive at an investment banking firm. In the parallel universe of dot.coms and apps, barn-burning growth is what counts, especially growth that burns your rival’s barn.

And that’s precisely what’s wrong with Amazon’s business model, according to the congregation in Oakland.

* * *

The three-day “Prosperity for All” event was co-hosted by Business Alliance for Local Living Economies, a group of 30,000 entrepreneurs, and Oakland’s business network Sustainable Business Alliance. I’ve been to a few business conferences, but never one with self-proclaimed “climate refugees” from drought-ridden states or composting bins masquerading as trash cans. Here was a refreshing mix of American faces and accents: A white cafe owner from Little Rock, Arkansas, worried that his business might drive out the longtime residents in his black neighborhood. Two women from upstate New York wanted to lift struggling shops in the Adirondacks. Then there was the enthusiastic group of Hispanics and whites dressed in matching blue T-shirts emblazoned with Local First. It turns out they were from Arizona, home of right-wing extremists and anti-liberal legislation. The shirts were made of cotton grown in the U.S., spun locally and sold by Fed By Threads, a Tucson firm that uses some of its profit to feed the hungry.

Wait: A locally made, feed-the-homeless, progressive company in the red state of Arizona? “I know,” sighed Kimber Lanning, the head of Local First Arizona. “We can’t fart without making it onto the national news these days. Our Legislature is just wacky.” Arizona became infamous after it passed SB 1070, the strictest anti-immigration law of its day. “But when we impeached the guy [Republican Sen. Russell K. Pearce] who wrote the bill, there were no national headlines.

“Same thing with the anti-LGBT bill,” or SB 1062, Lanning continued. Gov. Jan Brewer and her fellow Republicans pushed the anti-gay bill. But because of outcries from local restaurants, hotelsand hospitality businesses, the governor changed her tune and vetoed the bill. “What an embarrassment,” is how several Arizona voters described their political leaders.

Yet, Arizona’s large group of small-business owners is mixing a little blue into the state. Lanning, for example, owns a music record store called Stinkweed, which has 6,000 hard-to-find titles in ska, punk, dub, jazz and just about any other genre. She sells vinyl, CDs, DVDs, music books and magazines and recently built a stage so local favorites such as Old Time Relijun could perform at her store. She also runs the Arizona Local First coalition, which at 2,600 businesses, is the largest such group in North America.

The coalition has tried to erase the unfair advantages giant retailers have over small local shops. “It started with a simple case of county and state governments taking taxpayer dollars to subsidize chain stores.” Shop owners like Lanning were appalled that taxpayer incentives were given to Amazon, for one, when it built its West Phoenix warehouse. “They got a sweetheart deal on land, didn’t have to collect sales tax for several years, and wound up keeping $800 million out of city and state coffers for 2011 and 2012,” she said.

It wasn’t like the smaller rivals got to keep their retail sales taxes, too. “If me and my little record store decided not to pay sales taxes one year, the Department of Revenue would come down on me so hard, I’d lose everything,” said Lanning. It also wasn’t just the brick and mortar stores that suffered, but all online operations in Arizona. Paula Pennypacker (her real name) runs a niche business that sells beauty products just for redheads. “We’re a global brand with 150 products and more than 2 million customers in 100 countries,” Pennypacker said. She started her online outfit in 1993, two years before Jeff Bezos opened his Web business. But she’s collected and paid retail sales taxes for as long as Amazon has not.

“If you can buy mascara at Amazon for 10 percent less than what I can sell it for, you will even though my product is better,” she said. Amazon’s tax avoidance hurt her business, she admitted.

Local businesses tried to spread this message to friends and neighbors with little effect. When the housing bubble burst in 2007 followed by the crash in 2008 and the Great Recession, when big banks got bailed out but foreclosured homeowners in Phoenix, Cleveland and other cities were left to drown, things looked dire for Main Street. “Small businesses are the engine of the New Economy,” said Pennypacker. But national and local policies were stacked against them.

A few economists and researchers began to study the issue. “The more information consumers have, the more they buy local,” said Michael Shulman, a fellow of Post Carbon Institute. If local businesses provide good products and services and if chains continue to sell cheaper, shoddy products, consumers will shop at local stores. Other researchers went deeper and looked at Amazon’s effect on jobs. Brick-and-mortar retailers employ 47 people for every $10 million in sales, according to an analysis by ILSR of U.S. Census data. Independent retailers employ even more people and create 52 jobs for every $10 million.

However, Amazon employs only 14 people per $10 million in revenue. That means that as Amazon grew and took market share from other retailers, the number of U.S. jobs declined. In 2012, Amazon expanded its share of retail spending in North America by $8 billion, producing a net loss of about 27,000 jobs, according to the Institute of Local Self-Reliance.

“Local businesses keep more money in the local economy, employ more locals and pay their taxes,” Lanning explained. Her friends at BALLE, Local First West Michigan, Slow Money Northwest and dozens of others got a chance to trumpet this message in their own communities. In 2011, Arizona’s independent stores partnered with the Arizona Retailers Association to talk to their “wacky” legislators about changing the state’s no-tax policy toward Amazon. “It was funny that these big chains like Walgreens and Home Depot took our side in the discussion, but the law was hurting them, too,” said Lanning.

Faced with the retailers’ united front, Arizona’s Republican lawmakers listened to the localists explain the economics of independent businesses. “We talked about mounting a taxpayer lawsuit against Amazon,” said Pennypacker. “We talked about me getting a refund from the state for all the years my online operation paid taxes.” They talked about a lot of things.

But it all became moot after Arizona officials finally sent Amazon a $53 million tax bill. Amazon paid a nominal part of that bill and, on Feb. 1, 2013, agreed to begin collecting and remitting sales taxes on all goods sold to Arizonans. On July 1, 2013, it began paying taxes on digital goods like e-books, too. It was quite the victory for Local First.

That feat didn’t resurrect any of the long-gone stores, but it restored a sense of economic justice to Arizona’s business community, said Lanning. By 2012, Amazon’s competitive tax edge began to diminish and, today, some 22 states require the retail giant to pay sales taxes ranging from 4.5 percent (Virginia) to 10 percent (Birmingham, Alabama). The result is that households in those states have reduced their Amazon purchases by a significant 10 percent, say researchers at Ohio State University.

The authors of “The Amazon Tax” study also found that big purchases on Amazon (those over $300) fell by a whopping 24 percent. They found a 2 percent increase in local brick-and-mortar sales and and a 20 percent jump in purchases at Amazon’s online competitors. As one of the study’s authors, professor Brian Baugh, told me, “Avoiding sales taxes has been Amazon’s big edge.” The report also stated that this leveling of the playing field could help “restore business and jobs to local economies.” But Baugh and his team looked at only the top 20 corporate retailers and weren’t able to gauge sales at individual mom-and-pop stores.

Still, the Amazon Tax is expected to add $23 billion a year to states’ budgets, enough to forestall a few budget cuts. Since the imposition of that tax, Amazon’s growth has slowed, its stock price has dropped about 17 percent, and its sales are projected to be flat. Worse, it anticipates posting an operating loss, perhaps as steep as $455 million, later this month.

Another study led by Jeffrey Hoopes, assistant professor of accounting at Ohio State University, along with colleagues Jacob Thornock and Braden Williams of the University of Washington, showed that media reports of a federal tax could depress the stocks of online retailers such as Amazon. “Investors perceive that these e-tailers have a competitive advantage because they don’t have to collect sales tax,” said Hoopes. When that advantage disappears, stock prices drop.

Now comes a federal bill called the Marketplace Fairness Act of 2013 that will allow all states to collect sales taxes on online purchases. It’s been passed by the Senate and is slated for more hearings in the House. If the tax is assessed on the home state and ZIP code of the seller, not the buyer, then the bill would offer a smooth, efficient way for online retailers large and small to remit their share of taxes. “It’s a no-brainer,” said Pennypacker.

But it will lower Amazon’s stock price, the researchers agree, and at $333.55 Amazon’s stock is already near its 12-month low.

These days, independent store owners are smiling, whether they hail from the Adirondacks or from Arizona. “Our sales at the record store are up 12 percent,” said Lanning. “I can’t attribute it all to Amazon paying taxes, but that’s certainly some of it.”

Even better, said Lanning, is that the tax issue brought more consumers into the economic conversation. “People now realize that if we don’t collect sales taxes from everyone, then we don’t get to have our streets cleaned and our trash collected and our police and firemen paid,” she said. “That means that individual’s property taxes and income taxes will go up in order to keep the street lights on.” Why would you want to do that?

“A lot more people get it now,” Lanning said.

As a result, the local economy movement in hundreds of small and midsize towns around the country has gained some muscle and clout. Don’t be surprised if some policies and political alliances tilt in some red and purple states. In 2012, for example, the City of Phoenix adopted a new policy that said if the city intended to buy goods or services costing less than $50,000, it must first find a supplier based in its own home of Maricopa County or in Arizona before offering the job to an out-of-state firm. With that, the birthplace of Barry Goldwater adopted the same “buy local” mind-set as the bearded boomers and dreadlocked millennials in Oakland. “The city sees it as a way to support local businesses and its own tax base,” said one observer.

It’s not as if Amazon is going away any time soon. But the bigger question is how will shoppers react to this new information. Will fewer consumers be persuaded by Amazon’s advertising dollars to click the corporate “buy” button? Lanning the localist isn’t sure. “People think they are being so smart by shopping online,” she said. “But what they’re really doing is cutting local jobs and shutting down their home towns.”

Kathleen Sharp

Kathleen Sharp reports on business and entertainment from Southern California.

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