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Amazon Is Closing Its Distribution Gap, And That Could Mean The End Of Sales-Tax Deals

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Amazon (NASDAQ:AMZN) has cut another distribution-center-for-sales-tax deal, this time in Connecticut. On Monday (Feb. 4), the E-Commerce colossus said it will be building a DC in Connecticut and will also start collecting sales tax from Connecticut customers—but not until November. ("Hey, we're Amazon. We could do it tomorrow. But just to show you who's running this show, you can wait nine months.")

That's all in line with Amazon's recent delay-and-get-concessions approach to sales taxes. But the point of the exercise was always to give Amazon more flexibility when it comes to delivery—and with 16 states now potential locations for Amazon DCs, it may already have almost everything it needs. Amazon's deal-cutting days may be almost over.

Under this week's deal, Amazon will build a $50 million DC at a Connecticut site to be named later. That follows an Amazon sales-tax deal last December with Massachusetts (starts November 1; hints of a DC coming) and last May with New Jersey (starts in July; $200 million DC). After Amazon's big flip in its sales-tax strategy in 2011, the E-tailer is also now collecting sales tax in New York, Pennsylvania, Kentucky, North Dakota, Kansas, Texas, Arizona, Washington and California, with Virginia, Indiana, Nevada and Tennessee to be added to the list by the end of 2014.

That covers the lucrative West Coast, Northeast and Washington, D.C., areas, along with much of the Southwest. The biggest city in a state not covered is Chicago, and that's right across the border from Indiana. The number of states Amazon still needs to close its delivery gap is getting much smaller.

And once Amazon has those DCs in place, it has options that could cut the legs from under brick-and-mortar chains that are looking at same-day delivery as an advantage over Amazon. With close-in DCs, same-day becomes an option for far more Amazon customers (though it turns out that most of them seem to like the idea but don't actually use it).

Local DCs also make it practical for Amazon to contract out local delivery work—still potentially cheaper and faster than UPS (NYSE:UPS) or FedEx (NYSE:FDX). And Amazon could mix-and-match, depending on where inventory is actually in stock, with orders coming in multiple deliveries—some of it same-day, the rest same-week.

No matter how Amazon leverages those new DCs, having local inventory won't do it any good across large swaths of the U.S., where there's not enough customer density for either Amazon or chains to make quicker delivery profitable. That means there's no motivation for Amazon to cut many more sales-tax deals in the 29 states where it still doesn't collect sales tax.

Those states don't have a legal way of forcing Amazon and other E-tailers (or out-of-state chains doing E-Commerce, either) to collect sales taxes without an act of Congress. Congress has been dragging its heels on this subject for years, and there's actually less pressure on Congress now that Amazon has done its deals with the biggest states. Why should those states worry? They're already collecting their Amazon tax, which doesn't seem to have dented Amazon's profits.

Without that change in federal law, Amazon gets the best of both worlds. In the no-deal states, Amazon still doesn't collect sales tax. In the tax-deal states, it cuts its delivery costs and is out from under a potential legal cloud. (Well, everywhere except in New York, where it's collecting sales tax and still fighting it in court.)

Put another way, in more than half the states, brick-and-mortar chains lose on price; in the other half, they stand to lose on delivery unless more chains stop just thinking about matching Amazon's convenience and actually start experimenting the way Walmart (NYSE:WMT), Macy's (NYSE:M) and Nordstrom (NYSE:JWN) are.

Otherwise, by the time someone has demonstrated how to make things like same-day delivery work, it will no longer be an advantage over Amazon—mainly because it will probably be Amazon that figured out how to make it work.