Amazon.com Plays Up Advantage of Sales-Tax Mandates

Tom Gramegna, owner of the Bergen County Camera stores in New Jersey, has been waiting for July 1 to arrive for years.

It is the day e-commerce giant Amazon.com Inc. will begin charging sales tax on purchases by New Jersey residents. New Jersey will become the 10th state where Amazon collects sales taxes, as part of an agreement reached with New Jersey Gov. Chris Christie’s administration.

As part of that deal, Amazon promised to invest $130 million in two state-of-the-art distribution centers, and the state said the e-commerce retailer will be eligible to apply for economic incentives to build those facilities. No incentive grants to Amazon have yet been announced.

Amazon in the past has contended that it should be required to collect sales taxes only in those states where it has a physical presence. But states such as New York have required Amazon to collect taxes because it allows affiliate retailers, who are based in that state, to sell on its website. Retail groups have argued over the years that by that standard, Amazon did have a physical presence in New Jersey.

The Christie administration estimates that Amazon will collect between $30 million and $40 million in sales taxes within the first 12 months.

New Jersey residents will still not be charged sales tax on orders filled by Amazon affiliates based outside of the state.

“What should have happened a long time ago is finally happening,” said Gramegna, who has no doubt that the sales-tax change at Amazon will help his business. He said about 75 percent of New Jersey customers at his e-commerce website abandon their orders when the sales tax is added. “They can go shop around and get it without sales tax,” he said, and many of those lost customers end up at Amazon.com.

For some of the high-ticket camera equipment Gramegna sells, such as Leica lenses that can cost as much as $10,000, sales tax can add $700 to the price.

After years of aggressively fighting efforts to make it collect sales taxes – with hardball threats to close warehouses and kill jobs in sales-tax states – Seattle-based Amazon has surrendered the sales-tax fight in favor of a new strategy that could prove equally troublesome for Gramegna and other merchants. Amazon now wants to out-local the local stores by building distribution centers that will enable same-day delivery in most of the country.

Customers apparently don’t mind paying the sales tax once they discover how quickly they can get deliveries when Amazon puts distribution centers in their state, said Scot Wingo, chief executive officer of ChannelAdvisor, a North Carolina company that sells software that helps affiliate retailers sell on Amazon.

ChannelAdvisor, by tracking the impact of sales-tax collection on Amazon’s affiliate sellers – third-party sellers who hawk goods under the Amazon.com umbrella – has been able to measure what typically happens when states impose sales-tax collection, Wingo said.

First, Wingo said, there is a surge in orders immediately before tax collection begins, as customers in the affected state take advantage of the final no-tax-added weeks. When “tax day hits,” Wingo said, the impact on a state usually occurs in these phases. ChannelAdvisor found that for Amazon third-party sellers in California, sales rose by as much as 70 percent compared with other states in the week before tax collection began on Sept. 15, 2012. In November, after the tax was imposed, sales were down 5 percent to 10 percent, according to ChannelAdvisor. By the end of the year, sales had returned to normal levels. And, Wingo said, in the next three-month period after the tax collection began, sales were higher than they were in the pre-tax days.

“That’s the part a lot of people have a bit of a hard time getting their head around,” Wingo said.

Wingo attributes that post-tax increase to the fact that once Amazon is collecting taxes, it usually accelerates the creation of distribution centers in a state, which allows it to win customers with faster delivery. He said he saw that happen in North Carolina, where ChannelAdvisor is located.

“People start to learn about the convenience of having fulfillment centers in your state, and that starts to outweigh the negative – the tax cost of center convenience,” Wingo said.

Amazon has broken ground on a distribution center in Robbinsville, N.J. The center is expected to begin operations at the end of this year, or early 2014. Amazon did not respond to questions about other plans for distribution centers in New Jersey, but it has vowed to build an additional center in the state, and reportedly has acquired a former food warehouse in Woodbridge, N.J.

Amazon, Wingo said, has learned in other states “that by putting the product closer to you, you have a much better experience. It also saves them money, because they pay UPS and FedEx a lot less because it’s a shorter drive in that last mile between fulfillment center and the consumer,” he said.

Amazon tax collection “is definitely going to be a boon for us,” Gramegna said. He said the pricing model for camera equipment ensures that every retailer charges the same base price, so taxes are the main differentiator. “For us, now that basically the price is the same anywhere, if the choice is Amazon, with a box and a receipt and no help, or Bergen County Camera, with all the TLC in the world, it makes the choice pretty easy,” he said.

He also believes he can compete on same-day delivery, because his stores stock 12,000 different items and customers can try out a camera before buying it.

Paula Rosenblum, managing partner at retail consulting firm RSR Research, doesn’t think sales-tax collection will cost Amazon many customers. “People shop at Amazon because they get insanely fast delivery and really good prices. I don’t think they shop at Amazon because they don’t pay sales tax,” she said.

Rosenblum, like other retail analysts, believes convenience, not price, is how Amazon will win customers. “They’ve changed the bar so dramatically when it comes to delivery expectations that there’s hardly any words for it,” she said. “The challenge is that they also don’t make a whole lot of money, so you can’t exactly emulate them, because most of us couldn’t live on 1 percent earnings.”

In 2012, Amazon’s net sales climbed 27 percent to $61.1 billion, but it reported a net loss of $39 million, compared with net income of $631 million in 2011. Its operating income in 2012 was $676 million.

Joining the Tax Collection Club:

Next month, New Jersey will become the 10th state that requires Amazon.com to collect sales tax. The other states are:

• Arizona
• California
• Kansas
• Kentucky
• New York
• North Dakota
• Pennsylvania
• Texas
• Washington

(Florida will require tax collection starting next year.)