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Behind Amazon’s decision to place a geo-block on its Australian customers last week the US online giant is facing the threat of new taxes that could cost it more than $4.5 billion.

The real impact of Amazon’s Australian move is the message it sends to the European Commission and US states that it will resist attempts to impose new turnover taxes and it is prepared to punish governments who pursue them.

The stakes are way beyond any problem with paying Australia’s newly legislated 10 per cent GST on online sales.

The US Supreme Court is expected to hand down its ruling late this month on South Dakota v. Wayfair Inc, a decision which will recast the future of online retailing, one way or the other.

The court decision could potentially cost Amazon more than $3.5 billion, just as the European Commission’s call for a 3 per cent digital tax on online turnover could cost Amazon another $1 billion.

It’s in this context that Amazon last week announced that it was too onerous to calculate the 10 per cent GST due on sales to Australia from its US and European operations and therefore will stop all shipments to Australia from July 1, forcing Australians to buy from its smaller local arm.

“While we regret any inconvenience this may cause customers, we have had to assess the workability of the legislation as a global business with multiple international sites,” Amazon said.

How did it get to this?

The history of US online retailing has been shaped by the 1992 case Quill vs North Dakota, where the US Supreme Court found that a state could not levy sales tax on an online purchase – in this case Quill was selling software programs on floppy disks – if the vendor had no physical presence in the state.

Most US states depend upon sales taxes of between 6 per cent and 9 per cent for a major part of their income. So the Quill ruling automatically gave online sellers a 6 to 9 per cent price advantage over conventional retailers.

For most retailing it was a zero-sum game. Online sales exploded, while conventional businesses went broke.

South Dakota says that US states miss out on $US33 billion in sales tax on online sales because of Quill. Congress’s Government Accountability Office puts the figure between $US8.5 and $US13.4 billion.

It’s a double hit for the states, because not only do they miss out on sales tax for online purchases, they have to rely more on income from conventional retailers who are struggling to stay in business.

“Ultimately the loss of revenue is crushing,” the National Governors Association argued in an amicus brief in the case.

The retailer which has benefited most from this is Amazon. Its retail arm is a low-margin business, which reported $US106 billion of US sales last year. By next year Amazon is expected to account for just over half of all US online sales.

But in recent years its business model has changed to emphasise Amazon Prime’s distribution outlets, which gives it a physical presence in each state. So it has begun paying sales tax.

But that only applies to Amazon’s own products. Almost half of what it sells involves third-party vendors, which it says have no physical presence in other states so pay no sales tax. That would be something like $US50 billion of sales with no tax.

So Amazon has most to lose if the Supreme Court overturns Quill in the South Dakota v. Wayfair Inc case – and some commentators believe the court would not have accepted the case if the justices were not considering doing just this.

And then there is the EC’s call for a 3 per cent digital turnover tax.

Amazon EU Sarl in Luxembourg reported 21.6 billion euros ($33.3 billion) turnover in 2016, growing at 24 per cent year.

The EU is split on this. What will Amazon do if some EC countries like France and Spain impose a digital tax, while others don’t? Will Amazon EU say calculating different tax rates is too hard?

Amazon can pass these new taxes on to their customers, but in the process the online price advantage is eroded.

In the mean time Amazon’s mantra has become: “We support a federal law that would allow states to require sales tax collection by remote sellers under a nationwide system.”

That’s about as candid as BHP saying in 2010 that it would support a carbon trading scheme.

What Amazon is really saying is that rather than overturning Quill the courts should wait until Congress changes the law. And that is likely to be a long time coming.

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