Amazon to Collect CA Sales Tax

In an effort to relieve the financial stress faced by its state and local governments, California recently decided that Amazon.com, Inc. will have to collect California sales taxes just like everybody else.  Amazon deals mostly  in items that are relatively  price elastic in terms of demand.  The sales tax can be as high as 9.75% in California.  This price increase will drive demand for the majority of Amazon's products downward.
The higher costs will most certainly be passed on to the consumers, driving customers to other retailers.  Amazon will take the biggest hit on big-ticket items. The sales tax represents a significant cost to California consumers.   People who were content to purchase an item without actually being able to see it in person will now have less incentive to take that risk.  This will drive demand up for big-box retailers, who can provide a sandbox environment for people to experiment with a product before buying it.  This may explain the rumors that Amazon may soon open a brick and mortar store front.

One of Amazon's greatest advantages has been its ability to undercut the competition.  As more states turn to the enforcement of sales taxes for online sales, it is doubtful that Amazon will be able to manage its prices in a way that maintains its competitive advantage as an online retailer.  In order to remain viable, Amazon will need to reinvent itself as a virtual company with a more physical presence.


Clayton Parry said...

While it may be true that Amazon and other online retailers may suffer lost sales due to sales tax requirements I do not believe that this force them to open brick and mortar stores. Not having to charge sales tax has helped hold their prices down but, so has the lack of overhead requirements.

A physical presence has many additional costs associated with it that would increase prices even more. These overhead costs would include: employees, property tax, additional facility expenses, etc. These new costs would need to be absorbed into the sales price first, and then be sales tax. The effect of overhead on sales price would have a greater impact upon sales price and competitiveness than just sales tax alone.

People buy from online retailers because they enjoy a buyer’s surplus and also out of convenience. The sales tax would merely cut into the buyer’s surplus but probably not eliminate it like; the overhead would eliminate it. Plus, it is so much easier to log on from home and shop than to spend all day driving around to view and test products.

I like your thoughts I just feel that sales tax alone would not have as dramatic of an effect on sales as would a storefront.

Dominick said...

Admittedly, my knee-jerk reaction was to emphatically state that this will have little effect on Amazon's bottom line. However, after reading the article, I found it very interesting to note that Amazon may be working with thinner margins than I had originally anticipated. That being said, I tend to agree with Mr. Parry that a switch to brick and mortar stores isn't in line with Amazon's strategy nor corporate culture. Amazon now having to collect taxes will cause a shift in the demand curve, but I do not believe that it will be significant enough to send people rushing back to Target and Walmart, where they will still have to pay the sales tax anyway. It is interesting to note that some tax return documents actually provide a space where tax payers can voluntarily pay sales tax for online orders; to those individuals, there is virtually no change! In addition, Amazon will continue to advertise their products at current levels and then add the tax at the very end of the transaction (the same practice followed by brick and mortar retailers). Thus, the only consumers whose demand curve will actually be significantly altered are those who shop online specifically to avoid paying sales taxes. But this is where I further agree with Mr. Parry, that the majority of online consumers shop online for other reasons such as convenience, save on gas money, 24-hour service, etc.

Moh A said...

Though I agree with the comments by Clayton and Parry that the tax would likely have little effect on the online book giant, I disagree the tax will be entirely passed onto the consumers and cut into the consumer surplus. The number of alternatives like Ipad and Barnes and Nobles Nook tablets creates many substitutes for books sold on Amazon. So I think the demand is far more elastic than estimated. Proof of that will be when the tax goes into effect by there will only be a partial increase in price as the supplier absorbed part of the cost.

Dave Tufte said...

Tyler has a wording mistake, so 94/100. Clayton Parry has three spelling and grammar mistakes, so 39/50. Dominick had one, so 47/50. Moh A has a punctuation error, so 47/50.

Tyler contradicts himself. The first paragraph says that Amazon faces elastic demand. The second paragraph says that Amazon will be able to pass the cost of sales tax on to consumers. It's a basic result in the economics of taxation that the more elastic you are, the less likely you are to bear the ultimate burden of a tax.

Beyond that, I agree with Clayton Parry. I'm not sure about the conclusion that this will lead Amazon to be less virtual. It seems to me that the cost savings from avoiding retail are so large that this won't happen.

Michael said...

Although I agree with most of Tyler's key points, I do not think that the California tax will force Amazon to reinvent itself. Amazon has become such a dominate player in the online retail environment that it should be able to squeeze its suppliers even more to keep prices steady while absorbing the tax, much like Wal-Mart. In my opinion, the California tax will have little affect on Amazon's customers. I do not believe that the California tax will increase prices. Demand for Amazon's products will likely remain the same as before the tax.

Dave Tufte said...

Michael: looks like you trusted your spellchecker, 44/50.

No firm absorbs a tax. It is either incident upon suppliers (the tax is passed on to shareholders and other stakeholders - like the vendors you mention), or it is incident upon demanders (it is passed it on to consumers). Of course, it's usually a mix of both. I think what you're saying is that you expect it to be passed mostly onto vendors, so that the firm itself comes through this OK.

In all of this, you need to remember that taxes are incident most on those who are inelastic. So, why would vendors to Amazon have inelastic supply? (I'm not saying they don't, I'm just digging down to the root of what you're driving at).