The latest Fortune magazine cover story details Amazon’s critical role in the longstanding debate over Internet sales taxes.
Among the creation fables of America’s greatest enterprises, the issue of taxes doesn’t usually play a central role. But it’s integral to the founding of Amazon. When the company began selling books over the Internet in July 1995, three years after the Quill decision, exploiting the sales-tax loophole was very much on its founder’s mind. In an interview with Fast Company a year later, Bezos said he’d recognized that “physical location is very important for the success of a virtual business.” He based Amazon in Seattle partly to maximize the tax advantage.
“[I]t had to be in a small state,” explained Bezos, a libertarian who once donated $100,000 to defeat a proposed Washington state income tax on affluent residents. “In the mail-order business, you have to charge sales tax to customers who live in any state where you have a business presence. It made no sense for us to be in California or New York … I even investigated whether we could set up Amazon.com on an Indian reservation near San Francisco. This way we could have access to talent without all the tax consequences.” Alas, that wasn’t legally possible.
Low prices, along with convenience and huge selection, were a critical part of Amazon’s appeal. Allowing customers to dodge state and local sales tax amounts to a pricing advantage of as much as 10% — a huge edge in the world of razor-thin retail profit margins.
One interesting footnote: States could avoid the hassle of trying to tax Internet-based sales by scrapping their traditional sales taxes and adopting a consumed-income tax, much like the USA Tax the John Locke Foundation has proposed for North Carolina.
