Amazon.com & Sales Tax

Does Amazon.com owe its profits to a massive tax-payer subsidy? That’s the argument from economist Dean Baker. According to Baker:

While most stores must charge customers state sales tax, Amazon and other Internet retailers enjoy a special subsidy. They need not charge sales tax except in the states where they have a physical presence. (I believe that list is Washington and Utah.) That’s great news for Amazon, if we assume that state sales taxes would average 4 percent on annual sales of $15 billion a year, then taxpayers are subsidizing Amazon to the tune of $600 million a year, more than its annual profits. 

When I first read this, I wondered how not making consumers pay sales tax on goods they buy on Amazon amounted to a subsidy for Amazon. Isn’t that a subsidy for the consumer, who gets a lower price on his or her goods? 

Then I did some Google searching and discovered that economists aren’t too sure who gets stuck with the sales tax: Economists think that, if the legislators increase a sales tax rate, then the burden of the tax can fall on either party, depending on the nature of the market for the good being sold. 

Given that Amazon sells a fairly wide range of goods and plays in several different markets, it’s an open question as to who is enjoying the “subsidy” — Amazon or its customers. The other interesting angle here is the implication of Baker’s argument: He seems to be acknowledging that if e-commerce businesses were required to charge state sales tax, their profits would be suppressed. If I’m reading Baker right, he’s upset that Amazon hasn’t been taxed into the red, ergo he thinks such a profit-suppressing tax structure is a good thing, irrespective of the disincentive it creates for e-commerce. 

Tim Lee at CATO isn’t buying it: 

Some states don’t have sales taxes at all, but no one would consider that a taxpayer subsidy. My local Wal-Mart benefits from a variety of state and local government services here in the St. Louis area, such as police and fire protection, and roads and other infrastructure. At least in part, sales taxes go to cover the costs of providing those services. Amazon uses few if any services from state or local governments in Missouri, so it’s hard to see anything unfair about the fact that it doesn’t have to collect sales taxes here. 

Bonus Internet sales tax factoid: Consumers who live in a state that collects sales tax are technically required to pay the tax to the state even when an Internet retailer doesn’t collect it. When consumers are required to pay tax directly to the state, it is referred to as "use" tax rather than sales tax.