Best Buy and the Great Amazon Tax Subsidy

Best Buy is certainly struggling.  The company’s stock was above $50 per share back in 2007.  Today it is trading at about $20. The company is closing stores and analysts are skeptical about the future.

The company has a number of issues to address but I suspect the most important issue is what I call the Great Amazon Tax Subsidy.

The Great Amazon Tax Subsidy comes from the strange way local sales taxes are applied in the United States. Many municipalities raise revenue by taxing retail purchases. But companies that don’t have a physical presence in a given area don’t have to pay the tax. The result is that a retailer with a physical store location is at a substantial disadvantage when compared to an on-line player. In some cities this is a meaningful figure. In Chicago, where I live, the sales tax is 9.5%.

This means that in Chicago Amazon has a 9.5% cost advantage over Best Buy.  This is a hopeless situation for Best Buy. In 2012, Best Buy only had a 2% margin (pre-tax income/revenue). There is virtually no way that Best Buy can overcome this.

Customers that buy from Best Buy have to pay a substantial premium versus Amazon. They get the item immediately but in many cases waiting one or two days isn’t a big deal. Amazon is also more convenient and probably has a wider selection. Best Buy can’t win this battle.

Best Buy will continue to struggle if the tax policy remains in place. The company might not survive at all.

Of course, this isn’t just Best Buy’s issue. Many local retailers face the same problem. Politicians should shut down the Great Amazon Tax Subsidy and do it quickly before more local retailers go out of business.

6 Responses to “Best Buy and the Great Amazon Tax Subsidy”

  1. Zach Smith Says:

    1) Is there any existing evidence that suggests that consumers take sales tax into account when deciding where to purchase an item?
    2) I suspect that convenience, breadth of assortment, and lower retail prices BEFORE sales tax are all important competitive advantages that Amazon utilizes that will continue to hurt Best Buy even if the tax subsidy is ended.

    • Tim Calkins Says:

      Zach—I haven’t seen a study on the topic but I suspect taxes are a significant factor, especially in cities with higher rates (like Chicago).

      I agree Amazon has advantages that go far beyond the tax savings.

      Tim

  2. michael servet Says:

    “…companies that don’t have a physical presence in a given area don’t have to pay the tax.”

    This should probably read “don’t have to *collect* the tax”. Generally, resident consumers are obligated to report and pay the tax if it has not been collected by their retailer. At least theoretically, the tax is not a burden on the retailer, however in practice consumers don’t report and pay it, so it does become a competitive benefit to the non-collecting retailer.

    Times – and technologies – have evolved in the two decades since the Supreme Court excused retailers from collecting if they had no physical presence in the jurisdiction. With the technical tools now available — including of course the internet — there is no longer any reasonable excuse for non-collection — especially for an outfit with Amazon’s capabilities.

    It’s time to actually enforce existing laws consistently among taxing jurisdictions’ citizens – however they shop. They are obviously not voluntarily report, as they are required (in many states).

    I’m sure an outfit like Walmart will make its extensive tax tables available to the Amazon’s of the world, if the programming is too tough (ADP has already said it has the electronic remittance end covered, if we are interested – it has long been remitting payroll taxes to the thousands of jurisdictions).

  3. Y. Shaban Says:

    Amazon absolutely has a huge competitive advantage in, as Micahel Servet put it, not “having to collect” sales tax in many states. The customers do still owe the tax. In fact, this year Amazon is sending notices out to all their customers about how much product the customer had delivered to each state and that the customer should file directly with the respective states for the sales tax owed on products the customer bought.

    Amazon knows its days of the sales tax advantage are numbered. And, as a result, it seems to somewhat voluntarily be putting itself in a position to collect the tax, but making sure it gets full advantage of doing so. For example, in the state of TN, Amazon is opening up distribution centers that will help the co. compete even more aggressively with local retailers by delivering products next day or 2nd day via just standard shipping. Having a presence in the state will oblige Amazon to start collecting sales tax. But it has used the prospect of adding thousands of jobs to get the state to agree to a roughly 18mo free-ride in return for setting up the distribution centers. So Amazon now has a presence in the state of TN, has even more of an advantage now of being able to deliver products more quickly to residents of the state, and still has its sales tax advantage until Jan 1, 2014. That’s a very smart move because by then federal law will probably pass requiring all internet retailers to collect sales tax anyway.

    There will always be room for Best Buy, but not the way the busiess is set up now with it’s expensive square footage and ill-trained staff. Amazon.com is not only cheaper but it’s actually EASIER to shop at then Best Buy and many other bricks & mortar (B&M) stores. At Amazon.com, I can look at how well the product is selling by sorting by the bestsellers in each category and can then factor in this “wisdom of crowds” aspect to my purchasing decision. I can read reviews, including most helpful reviews and most critical reviews, etc. I can comparison shop prices, I can do quick google “vs” searches. And within 20min, I can figure out what the best camera is for my budget or the best TV or any other item. In fact, often times even when I need a product immediately, I go to Amazon first to do a quick search to figure out which one I need to buy.

    To win over those who want instant gratification, Amazon can do several things. Amazon can set up pick-up centers in all these distribution centers they are building. It seems that soon they could have a distribution center within 45min driving distance of over 65% of the population. They can even set up large vending machines at shopping malls stocked with Amazon’s best sellers in a few different categories. If they already have distribution centers in the area, someone from the center can easily make a daily trip to re-stock and service the machine.

    As Amazon makes itself every more efficient, I believe it will continue to win against B&M stores. Best Buy needs a radical re-thinking of their strategy.

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