SAN FRANCISCO - Some Amazon.com shoppers are in for a rude awakening as they click to checkout with holiday purchases on Black Friday - they'll have to pay the taxman.
For the first time since the dawn of e-commerce, residents in California, Texas and Pennsylvania will be automatically charged state sales tax at the checkout on Amazon and some other online retail websites. Next year, Virginia and New Jersey residents will join them, followed by residents of Nevada, Indiana and Tennessee in January 2014.
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Amazon pulled in $17.45 billion in the fourth quarter last year, or 36 percent of its annual revenue. Critics have argued that Amazon has become one of the top retailers in the country by undercutting them among consumers who knew they could go to the online retailer to avoid as much as 9 percent in sales tax. Amazon disputes the claim.
"We lose sales every day -- not just on Black Friday -- but any time we compete or try to compete on an unfair playing field," said Scott Mason, vice president of government affairs for Lowe's, the home improvement chain, which has Black Friday specials on everything from cordless drills to vacuums to artificial Christmas trees. Lowes.com collects sales tax from shoppers in every state that has a sales tax and where the company operates stores and warehouses. "It's absolutely a position of disadvantage."
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A growing number of states have grown impatient with the inability of Congress to pass a national online sales tax law and have taken matters into their own hands and passed state legislation. Big retail chains - like Wal-Mart and Target - that have been lobbying in support of a federal bill will be watching this holiday season to see if sales drop at online sellers once they start paying the taxman.
"Now for a sizeable chunk of the U.S. population, Amazon is playing by the same rules as the rest of the retailers," said Jason Brewer, a spokesman for the Retail Industry Leaders Association. "There are going to be fewer people who shop online solely for the sales tax benefit."
Amazon, the nation's top online retailer with an estimated 20 percent of the ecommerce market, expects sales for the 2012 holiday season to be the company's best ever, regardless of changes in state laws, according to a spokesman. As e-commerce grows, Amazon's share of it grows even faster, from nearly 11 percent in 2012 to 12 percent in 2013, said Victor Anthony, senior analyst at Topeka Capital Markets.
Consumers are, of course, price conscious but it has been unclear how many would shift their shopping behavior to avoid paying sales tax at the online teller. About 25 percent of online shoppers said they would go to a different retailer if a sales tax had been charged, according to a 2011 study by Forrester Research.
Amazon doesn't anticipate losing customers by charging taxes. "As analysts have noted, we offer customers the best prices with or without sales tax," said Scott Stanzel, an Amazon spokesman. "We collect sales tax or its equivalent in more than half of the areas where we do business and we are pleased to say we are thriving in those geographies because Amazon offers low prices, vast selection and fast delivery."
Tax officials in California and other states that have passed new requirements for online retailers to collect sales tax anticipate a revenue gush.
As retailers battle for shoppers, state tax officials are already seeing a boost in tax revenue. Since Californians began paying sales tax for online purchases in September, the state has seen $11.9 million in sales tax revenue for third quarter online sales and expects to see $173 million in the 2012-13 fiscal year, said Betty Yee, a member of the California Board of Equalization. California's average sales tax rate is 8.13 percent, according to The Tax Foundation.
Shoppers are gearing up for what has become a ritual of major shopping days following Thanksgiving. Many retailers and e-tailers are getting a jump on Black Friday, the day after Thanksgiving, by offering promotions that start as early as midnight. Then there's Cyber Monday, which has become the annual peak day for online holiday sales. Last year, online sales during Cyber Monday topped $1.25 billion, up 22 percent from 2010, which itself was a record year, according to research firm comScore.
Amazon's competitors are taking on the e-commerce giant more than ever, sensing a bit of vulnerability.
Without the sales tax advantage, retailers are planning to go aggressively head to head with Amazon, intertwining technology and their physical locations more than ever.
For example, 40 percent of Best Buy's online shoppers opt to pick up items at nearby stores. Wal-Mart has begun offering same day delivery, competing with Amazon Prime, a $79 annual subscription or $7.99 a month for free, two-day shipping in the United States. Some stores have offered to match competitors' online prices, which might change hourly.
Amazon has offered physical services like pop-up stores, delivery kiosks, lockers and return hubs.
Jonathan Johnson, Overstock.com's president, doesn't expect to see a pick-up in sales in states where sales tax is now collected by Amazon. Overstock severed its relationships with marketing affiliates so it wouldn't risk having a physical presence in places like California and face the requirement of collecting sales tax at the point of purchase.
"Customers are looking for quality products, good price and overall good customer experience. I think people are used to paying sales tax," Johnson said. Overstock executives have been to the Hill advocating for changes to the federal bills, which would give states the power to require the firm to collect sales tax.
But some retailers say they are seeing results in states where Amazon is collecting sales tax. Best Buy has seen a four to six percent increase in sales in California, Texas and Pennsylvania compared to the rest of the chain since the states began to require online retailers to collect, said Amy Von Walter, a spokesperson at Best Buy.
"These are encouraging data points," she said. "It lends itself to the idea that a level playing field is good for business."
Small online retailers say states like California, Texas and Pennsylvania have dealt with the biggest problem - different rules for big retailers. "States can address the real problem without persecuting the small, web-enabled retailers who are important to long-term growth and retail competition," said Phil Bond, executive director of the WE R HERE coalition, which counts eBay as a member. While there may be more equality between big box sellers in some states, some small retailers around the country say they continue to worry about losing sales to online retailers. Jim Rosenheim, the owner of The Tiny Jewel Box, a Washington, D.C. brick-and-mortar jewelry store, said that "if someone could pay 6 percent less on a product, they would buy it."
The controversy over charging sales tax on Internet purchases dates back to a 1992 Supreme Court decision finding that catalog and mail-order merchants had no obligation to collect state and local sales taxes from places where they didn't have physical operations - like factories or warehouses. Customers are supposed pay sales taxes on the purchases directly to the state, but relatively few ever do.
While Amazon talks with a lot of bravado about expectations for sales this holiday season, and supports passage of a federal Internet sales tax law, the company acknowledged in its latest quarterly filing with the Securities and Exchange Commission that the tax issue poses potential risks for the company's bottom line.
"More than half of our revenue is already earned in jurisdictions where we collect sales tax or its equivalent," the company said. However, it added, "A successful assertion by one or more states or foreign countries requiring us to collect taxes where we do not do so could result in substantial tax liabilities, including for past sales, as well as penalties and interest."
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