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Amazon losing sales because of sales tax

April 23, 2014

Amazon.com's inexorable march to retail dominance has hit a bump in the road. According to a new report from researchers at Ohio State's Fisher College of Business, Amazon households in states where it previously did not collect sales taxes reduced their spending on the site by 9.5 percent once the levies went into effect.

The drop in spending was most evident when it came to bigger shopping carts. According to the research, purchases of $300 or more on Amazon decreased by 23.8 percent once sales taxes were added to the price.

Brick and mortar rivals to Amazon.com and other pure play e-tailers have long argued that collecting sales tax has put them at a disadvantage. "There is no ambiquity," Brian Baugh, one of the report's authors was quoted as saying by Bloomberg News. "It has been their competitive advantage."

While collecting sales tax has hurt Amazon, it has only translated into small gains (two percent) for brick and mortar stores. The reason, according to the study's authors, is that these consumers have taken their business to other merchants that are not collecting sale tax in their states.

Competitive e-tailers saw sales increase 19.8 percent after Amazon began collecting taxes. On the plus side for Amazon, many of these merchants are members of its Marketplace, meaning Jeff Bezos and company get a cut anyway.

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Discussion Questions:

Do you agree with the Ohio State researchers that not collecting sales tax has been Amazon's competitive advantage? What will Amazon need to do to overcome the perception of higher prices caused by sales tax?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Do you think the requirement to charge state sales taxes will "level the playing field" for Amazon and its competitors?

Comments:

I am pretty gobsmacked by these results. I certainly never thought of it in those terms, but data is data.

If the study is correct, then Amazon is in a tight spot. The company really does need to raise its prices, but it effectively already has had a price hike, even though it gets no benefit from those dollars.

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Paula Rosenblum, Managing Partner, RSR Research

Tax free sales clearly were a competitive advantage for big A, but probably not as much as grumbling b&m competitors believed. In fact, the reported 2% net gain bears that out.

Amazon's success is not based on tax free sales, so while this may dampen bigger cart totals for a while, the company has deep pockets, market advantages, and a huge enough customer list that they will not be sidelined by this. Competitors hoping for a free ride by the leveling of the tax collection playing field best start innovating and servicing customers better (especially physical retailers) because this hitch in the numbers won't last too long.

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Ken Lonyai, Digital Innovation Strategist, co-founder, ScreenPlay InterActive

Amazon had a competitive advantage by not collecting sales tax. Now it needs to compete on the basics: selection, price, convenience and customer service. It does all of these quite well.

The most interesting statistic to come out of this research is that consumers, while cutting back on Amazon, did not turn to brick and mortar stores. They chose other online retailers, many of whom are members of Amazon Marketplace. Brick and mortar retailers should react to this information by improving their customer experience.

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Max Goldberg, President, Max Goldberg & Associates

Of course it was a huge edge to Amazon, and the fickle, price savvy consumers are not happy, as the money they saved could change how they spend their money. Amazon still does what they do well, but the tax savings were one of the reasons they started doing business online in the first place.

The government needs more revenue to feed the beast, and who knows, maybe there will be an internet shipping fee, kind of like the phone company bills tacked on as well. I'm serious about this, but hopefully it won't happen. Brick and mortar still needs to work smarter, in order to compete no matter what, but this does slow things down a bit for now.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

Sure Amazon has benefited from a tax advantage for these many years. Now that is slowly coming to an end. Amazon is still Amazon. They will lose some business. But their extraordinary sales/service model will still have them at the top of the leaderboard. Brick & mortar will benefit ever so slightly that it will hardly make a difference.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

It's been one of Amazon's competitive advantages, but they have a few such as strong management, their more sophisticated use of technology to drive their business, ability to know how their competition is pricing items in (near) real time, Prime, etc. Am sure they are working on ways to compensate for having to charge sales tax now, although that will close a significant gap for many retailers.

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Bill Davis, Director, MB&G Consulting

I can look to my own personal spending habits since Amazon started collecting sales tax here in Massachusetts. I recently needed to buy a Blu-Ray DVD player, but I ended up buying it at Best Buy since the price was nearly the same. I definitely would have ordered it from Amazon a year ago.

At the same time, Amazon knew this was coming. They've been preparing for it, and have been creating other competitive advantages besides the tax. But I for one like that it leveled the playing field for all retailers...and especially the ones who employ people and pay taxes in our local communities.

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Doug Fleener, President and Managing Partner, Dynamic Experiences Group

Since I live in Washington state, my Amazon purchases have always been taxed. The big draw for ordering from Amazon is availability of product and the convenience of having it shipped to my door. In the long run, the charging of sales tax in other states will be par for the course and not have a long-term affect on sales.

'RetailRetell'

To charge sales tax or not, that has been the question. Amazon gained a competitive advantage in the past from not collecting sales tax as well as from its great creativity.

Consumers are in cahoots with lower prices. If Amazon must collect sales taxes in every state, it will have to upgrade its innovations for its consumers rather than blaming the collection of sales taxes for any higher prices that might bring. And, my guess, that is within Amazon's capabilities.

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Gene Hoffman, President/CEO, Corporate Strategies International

Yes, this has been an advantage, albeit a small one. Most folks are only concerned about sales tax on larger purchases, IF they can get the same item, with the same service, somewhere else....

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Kai Clarke, CEO, American Retail Consultants

A consumer "saving" 8-10% when Amazon doesn't collect tax has been an advantage. It's not uncommon to hear a customer say, "I'm using Amazon; no shipping and no sales tax." Amazon still has an incredible advantage. They are easy to do business with, have great selection and price. Their Prime program is a case study on how to create - and charge for - customer loyalty. Sure, sales tax takes away an advantage, but Amazon's success comes from much more than that.

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Shep Hyken, Chief Amazement Officer, Shepard Presentations, LLC

Not collecting sales tax is one part of Amazon's advantage, but not the sole competitive advantage. As sales tax has continued to rise, a number of consumers look for ways to purchase high ticket items from sources that do not charge sales tax. The article does not say whether the decrease was in the number of purchases or the amount of money spent. It would be interesting to know which had decreased - the number of items or the amount spent. There is a higher price when sales tax is added and any of the consumers who are shop based upon sales tax will know that and see that. Amazon just needs to continue adding value to shoppers with all the other advantages they have, and they will be fine.

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

It was a sweetener. Amazon is a monster retail brand with the emphasis on BRAND.

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Joel Rubinson, President, Rubinson Partners, Inc.

Such an impressive brain trust behind this study - yet HOW COULD THEY BE THIS OFF-BASE? Consumers don't give a **** about paying a couple of bucks in sales tax. They never have. They just want the best deal they can find out there and/or a specific item they know they can find if they search for it on Amazon. Walmart has it cheap...Amazon has it cheaper.

Same goes for the bogus MFA argument that consumers will gas up their cars and drive to the malls, walk into retail stores, find some things, then drive all the way back home and buy them online just so they can avoid paying sales tax (known as "showrooming"). This whole MFA argument is solely to appease Best Buy, Target and Walmart because they're in a panic, having been passed by by Amazon and other craftier online or catalog retailers.

'CatalogGuy'

I don't know what gobsmacked means, but it is pretty descriptive so I'll just go with that! No doubt taxes would make a difference, but I really didn't think that much. I honestly thought convenience was the bigger draw.

I think Amazon is headed in the right direction with their subscription services and even if convenience may not have been number one before, it is bound to be now. And that's my 2 cents!

Lee Kent, Let's meet share and succeed in Retail, YourRetailAuthority

I'm surprised that the decline has been as much as 9.5%, but the drop on large orders of 23.8% suggests to me that consumers might be abandoning carts due to unexpected sticker shock. I wonder if Amazon is not able to regain those lost sales once customers become more accustomed to being charged sales tax on their orders.

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Ted Hurlbut, Principal, Hurlbut & Associates

Amazon continues to succeed by understanding consumer value and convenience - and constantly reevaluating the equations. It's a complex formula that starts with individual perceptions and requires constant adjustment in the competitive, evolving market place.

For many Amazon shoppers, it's about convenience, locating products quickly, and hassle free delivery without the drive to the mall. The sales tax question was a minor factor influencing the decision for many purchases; it's about value - price + benefits - that keeps shoppers loyal.

Most Amazon Prime shoppers noticed the increase in subscription price, but stayed with the program because of the convenience provided. Amazon is investing and experimenting on so many fronts, including price optimization, that it will continue to identify new opportunities at a rapid pace.

Anne Bieler, Sr. Associate, Packaging and Technology Integrated Solutions

Yes, I agree that not collecting sales tax was always one of Amazon's biggest competitive advantages. What interests me is the that, "The drop in spending was most evident when it came to bigger shopping carts. According to the research, purchases of $300 or more on Amazon decreased by 23.8 percent once sales taxes were added to the price." I'd love to understand what it is about the bigger purchasers and purchases that triggered the "nay" button in the consumer once sales taxes were added to the price.

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Naomi K. Shapiro, Strategic Market Communications, Upstream Commerce

No, it has not been Amazon's ONLY advantage, but was an important advantage. When I buy form Amazon now, I will check prices other places as many other etailers don't collect sales tax. However, if it's a relatively small purchase, I stick with Amazon because I can get what I want and their prices are, in most cases, better than anything I can get locally. But now they are 6% higher than they were before.

 Amazon is blessed by the addition of thousands of new sellers/retailers who really don't have warehouses or even employees to worry about. They buy cheap and sell cheaper and that will keep Amazon on top of the heap.

Ed Dennis, Sales, Dennis Enterprises

Three questions on the study:

1) 10% drop for Amazon. 2% increase for B&M. 20% for online retailers. 61% increase for 3p sellers on Amazon. But off what base? Let's see the dollars and then draw conclusions. I suspect the B&M shift is far more significant than the misleading meager number of 2%.

2) Prime vs Non-Prime? The methodology prohibited the ability to separate the two because credit card data was used. We know Prime customers are far more loyal, spend more, and are less price sensitive - net net, the most valuable customers. How were they impacted?

3) About that credit card data. Which financial institution did they use? Was it a bank? Visa? Critical to know to make sure we understand the data set.

All that said, no, this was not their sole competitive advantage (far from it - in fact, it's been flagged as unsustainable in every annual report since Amazon went public). The idea that any playing field was leveled to any measurable, or sustainable degree is absurd - that's just B&M's trying to make themselves feel better about the disruption happening under their feet. Short-term gains? Maybe. Long term benefits? Doubtful.

The most important thing to remember is that with each state sales tax agreement, Amazon adds FCs. More FCs means faster ship times, better customer service, and at a lower, more profitable cost to serve. 10% decline in revs in a tiny time period as measured here, compared to the 5, 10, 20 year view Bezos takes to the business.

High fiving B&M's may find the party is short lived.

Daniel Silverman, Vice President, Business Consulting Services, Clavis Insight

One of Amazon's advantages is no sales tax. However, it is not their only advantage. Others include, widest selection, lowest prices, easy return policy, and convenience of ordering online.

One thing Amazon can do to overcome the perception of higher prices is to emphasize its other advantages.

Tom Borg, Business Expert, Tom Borg Consulting, LLC

People have watched the creep of taxes in their lives, especially over the past several years, even as politicians and government bodies (local, state and federal) have tried to convince themselves that a few more cents per transaction, or that taxation on a previously un-taxed product or service, or that another half-percentage point here, or another "fee" there wouldn't be noticed by citizens. Well, all this *is* being noticed by citizens and it's having a cumulative effect on their wallets and psyches and buying habits.

Amazon had a huge competitive advantage for a long time and now it's gone in many states. Of course, large purchases (baskets) are the first to go since adding say, $29.10 in tax onto a sale is more obvious and jolting and impacting to buyers than having say, $3.80 tacked on to a smaller one. Why are some so surprised that Main Street and b&m stores (which have increasingly been facing the very same tax issues) have not benefited from Amazon's misfortune?

'Liatt'

I've noticed a lot of people aren't looking at their Amazon invoices closely. Many aren't even aware that tax is being collected yet.

I plan to shop elsewhere when possible. It takes time to find alternatives. I think the slide in income for Amazon will increase as users notice the tax and find alternative stores to buy from.

'dschmitty'

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