Here’s why Amazon left 18% at the table

By Jesse Harris

When news broke about Amazon starting to collect sales tax for purchases made in Utah, it seemed a little curious that they would not be taking advantage of a state law that would allow them to retain up to 18% of the taxes they collected. Aren’t businesses supposed to try and maximize their revenues and take advantage of any incentives available to them? Don’t feel too bad for Amazon, though. They’re actually going to do really well from their deal.

While Amazon is passing on the 18%, they are still going to be collecting 1.31% of sales tax receipts as compensation for their costs of collecting and remitting sales taxes to the state. This is the same amount that brick-and-mortar retailers receive for their troubles. Amazon, however, has a built-in advantage: their ability to scale efficiency. All of their transactions are automated and electronic. For them, there’s little that has to be done other than adding a few pieces of computer code. There is no cash handling and few additional employees to be added. It’s entirely possible that agreeing to collect sales tax turns this into a profit center for them.

So if they can likely make money at 1.31%, why not accept the 18%? It’s all a PR campaign. If Amazon says “no thanks,” it places pressure on other online retailers to also eschew the higher cuts to avoid looking bad. Few other retailers are likely to turn a 1.31% cut into a profit center the same way Amazon will because they can’t scale the same way. At best, they will find a way to break even, but possibly with small price increases to offset any costs. Given Amazon’s drive to be a platform for everything, it may not even be all that long after that they offer up their sales tax platform as a service (for a fee, of course) to other online retailers.

There’s no altruism in this deal, just Amazon doing what it needs to do to further its own position in the market.

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