Amazon's New Sales-Tax Strategy: No More Mr. White Knight

Amazon, which last year was spending millions of dollars to fight online sales taxes, is now throwing its E-Commerce competitors under the sales-tax bus. Last week, Amazon sent E-mail notices to South Carolina customers, reminding them that they owe sales tax on Amazon purchases—but without Amazon actually collecting tax when a sale is made, thereby hiking the price a customer pays.

That means Amazon gets to build South Carolina distribution centers and enjoy a five-year holiday from having to collect sales tax—while Overstock.com, eBay and even Wal-Mart become the new big targets in the crosshairs of state tax collectors.

The E-tail strategy of letting Amazon lead the charge and take the arrows has turned around. Now Amazon is setting the standards—and they're standards that benefit Amazon while they may hobble its online competitors.

Case in point: the messages Amazon sent to its South Carolina customers. Under the deal Amazon cut with the state government, Amazon has informed all customers how much they spent with Amazon during 2011 and told those customers they might owe sales tax (technically, it's called "use tax" when the retailer is out of state and doesn't collect it) that should be paid on their state income tax form.

But Amazon also gets to tell customers it's not giving the state their names or how much they spent. That lets Amazon paint itself as a defender of customer privacy (and also, by definition, hints that customers are not likely to get caught if they don't pay). See, Amazon can imply, we're not the ones asking you to pay a second time for things you bought months ago. It's not our fault, and it's up to you to do—well, whatever you need to do.

Amazon has worn the mantle of privacy defender before, when North Carolina was demanding information on Amazon customer purchases. That ended up in federal court, with a judge's ultimate decision that didn't actually protect customers from having their names and total Amazon purchases from being sent to the state. But it sounded great when Amazon announced its victory.

That's not the worst of it for Amazon's competitors. If Amazon is sending out those letters in South Carolina, how long will it be before the state demands that Overstock, eBay and other online retailers do the same thing? Remember, Amazon cut a deal to make this happen: In exchange for sending those letters, Amazon gets to build distribution centers in the state (DCs that it wanted to build anyway) without collecting sales tax for five years. Amazon has also had months to tweak its systems so that sending out those use-tax messages is a trivial process.

Amazon got something for its trouble. Every other E-tailer will get the expense without the benefit.Amazon got something for its trouble. Every other E-tailer will get the expense without the benefit—and with Amazon no longer a target, the next tier of online retailers will be the ones getting the attention.

The South Carolina situation isn't alone. Six months ago, Amazon was pouring money into an initiative to repeal a new online sales-tax law in California, collecting signatures from customers in front of the brick-and-mortar retailers who had pushed for the law. (Aw, it must have been a coincidence. Would Amazon play that type of hardball?)

Then in September 2011, just after Amazon collected far more signatures than it needed to get its repeal measure on the ballot, the E-tail giant cut a political deal: Amazon got another year without doing sales-tax collection in California, it got to restore its canceled California affiliates program, and it got to play the populist anti-tax hero.

The other online retailers who thought Amazon was fighting on their behalf? They get no special consideration (except California-based eBay), and they'll end up having to go along with whatever Amazon and the tax collectors decide.

Since then, Amazon has continued to cut sales-tax deals that get Amazon off the hook for a few years (until 2016 in South Carolina, 2014 in Indiana and 2013 in California and Tennessee), but also set precedents that aren't designed to benefit anyone but Amazon. Because Amazon already has the infrastructure in place to collect online sales taxes (the company claims it's actually collecting the taxes on about half the business it does), whatever Amazon negotiates is really not likely to be optimal for anyone who thought Amazon was E-Commerce's bodyguard last summer.

But what's worse for non-tax-collecting E-Commerce retailers, ranging from eBay to Wal-Mart, is that Amazon has been capitulating on sales taxes strategically. The longer Amazon cuts online-tax deals as a proxy for the E-Commerce industry, the better it will get at getting not just warehouses and tax holidays for itself out of the deals but also strategic advantage over other E-tailers.

By waging those expensive, high-profile fights against sales taxes, Amazon gained a public image as a company that fought for lower online prices and lost. Now it gets to cash in. And with Amazon no longer in the sales-tax spotlight, its biggest competitors are about to get the deer-in-the-headlights treatment.

That means eBay will have to argue in dozens of states that even though regular auctioneers have to collect sales taxes, online auctioneer eBay shouldn't have to. Overstock, L.L. Bean, CDW and Newegg will likely be next in line for tax collectors to go after.

And having been set up by their biggest competitor, it's not likely to be pretty.

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