Be careful what you wish for… local retailers shoot themselves in the foot with an Amazon

For a long time, beyond the intrinsic ease of shopping experience, Amazon enjoyed a price advantage over local retailers in most markets. The price advantage came from three sources:

  • Scale: Amazon is simply a very large operation, and so can source goods more cheaply
  • Operations: Amazon is what we used to call a “Web pure-play”, and so can maintain less physical space, mainly warehouses, and do so in less-expensive locations than local stores that depend on accessibility to and desirability of local customers
  • Taxes: Under the 1992 US Supreme Court ruling Quill v. North Dakota, a company must have substantial physical presence in a state for the state to require it to collect sales taxes. Thus, Amazon has not collected sales taxes for most states, those within which it does not have presence.

Unsurprisingly, state politicians have been trying to get sales taxes from online merchants, notably Amazon, for years now. On the one hand, they view it as an additional source of revenue, and politicians can never have enough. But on the other hand, local merchants and big-box retailers have looked at the growth of online commerce and, like all incumbent players, have tried to stop the new entrants who are “stealing” their “legitimate” business through “unfair” practices. And so the usually-well-connected merchants and big-box retailers have lobbied their politicians for years to get those evil online merchants to charge the same sales tax.

Be careful what you wish for.

Amazon reached an agreement with New Jersey to collect the sales tax… in exchange for building a distribution warehouse right there in New Jersey, and all of the tax incentives that go with it. Amazon doesn’t really need another distribution warehouse; it has plenty. It certainly doesn’t need it in rural New Jersey. What it does get from this warehouse… same-day delivery. Amazon will still have some price advantage over local merchants and big-box due to scale and operations, while losing the sales tax advantage. But now, they will offer the same experience and prices with same-day delivery. Even with two-day delivery – free for Amazon Prime members – if you needed it *today* you went to your local merchant. In some respects, same-day was the last bastion of local merchants, because even the best e-tailer couldn’t get it to you today. Not any more.

It appears to me that the merchants won the battle but will yet lose the war.

About Avi Deitcher

Avi Deitcher is a technology business consultant who lives to dramatically improve fast-moving and fast-growing companies. He writes regularly on this blog, and can be reached via Facebook, Twitter and avi@atomicinc.com.
This entry was posted in business. Bookmark the permalink.