advertisement
advertisement

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

Written by Frank Hayes
February 6th, 2013

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.


advertisement

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

  1. Ann Grackin Says:

    Although this may be the buzz in the US, same day, or precise delivery windows for home delivery have been de rigueur in the UK and Asia for many years. In the UK, online grocers can offer one-hour delivery in certain locals. And in Korea, grocers have two-hour delivery after you order.
    New models like click and pick, drive through and other formats and growing allowing the retailer to experiment with different formats based on the local customer/market.

    But same day is not new nor is it really point when it comes to what customers really require.

    The real question is what does the customer need and want? What is the best methodology to provide it? We are doing a lot of research in this area of practices across the world where same day (and just in general home delivery) is done well. Mostly the real issue is about providing choice to customers and at the same time an economical option for the retailer. It can be done. John Lewis is a great case in the UK.
    The challenge will be to create a technology and process (people, transportation equipment, expertise in the terrain/domain of the customer), etc. to keep appointments and provide that service as agreed with the customers and not disappoint.

Leave a Reply

Readers, specifically those who want to comment on a story:
Our Comment SPAM system is getting very aggressive these days and has been blocking legitimate comments. If you post a comment and don't see it appear within 2 hours or so, can you please send a heads-up to customer-service@storefrontbacktalk.com? Ideally, please include the time you posted the comment. That will allow us to try and hunt for it. Thanks! P.S. We're working on fixing the system, but we don't want to lose any valuable comments in the meantime.

Newsletters

StorefrontBacktalk delivers the latest retail technology news & analysis. Join more than 17,000 retail IT leaders who subscribe to our free weekly email. Sign up today!
advertisement

Most Recent Comments

Why Did Gonzales Hackers Like European Cards So Much Better?

I am still unclear about the core point here-- why higher value of European cards. Supply and demand, yes, makes sense. But the fact that the cards were chip and pin (EMV) should make them less valuable because that demonstrably reduces the ability to use them fraudulently. Did the author mean that the chip and pin cards could be used in a country where EMV is not implemented--the US--and this mis-match make it easier to us them since the issuing banks may not have as robust anti-fraud controls as non-EMV banks because they assumed EMV would do the fraud prevention for them Read more...
Two possible reasons that I can think of and have seen in the past - 1) Cards issued by European banks when used online cross border don't usually support AVS checks. So, when a European card is used with a billing address that's in the US, an ecom merchant wouldn't necessarily know that the shipping zip code doesn't match the billing code. 2) Also, in offline chip countries the card determines whether or not a transaction is approved, not the issuer. In my experience, European issuers haven't developed the same checks on authorization requests as US issuers. So, these cards might be more valuable because they are more likely to get approved. Read more...
A smart card slot in terminals doesn't mean there is a reader or that the reader is activated. Then, activated reader or not, the U.S. processors don't have apps certified or ready to load into those terminals to accept and process smart card transactions just yet. Don't get your card(t) before the terminal (horse). Read more...
The marketplace does speak. More fraud capacity translates to higher value for the stolen data. Because nearly 100% of all US transactions are authorized online in real time, we have less fraud regardless of whether the card is Magstripe only or chip and PIn. Hence, $10 prices for US cards vs $25 for the European counterparts. Read more...
@David True. The European cards have both an EMV chip AND a mag stripe. Europeans may generally use the chip for their transactions, but the insecure stripe remains vulnerable to skimming, whether it be from a false front on an ATM or a dishonest waiter with a handheld skimmer. If their stripe is skimmed, the track data can still be cloned and used fraudulently in the United States. If European banks only detect fraud from 9-5 GMT, that might explain why American criminals prefer them over American bank issued cards, who have fraud detection in place 24x7. Read more...

StorefrontBacktalk
Our apologies. Due to legal and security copyright issues, we can't facilitate the printing of Premium Content. If you absolutely need a hard copy, please contact customer service.