Amazon, Forced to Collect a Tax, Is Adding Roots

By DAVID STREITFELD | New York Times Wed, Sep 12, 2012 12:10 PM EDT

Companies:

Amazon.com Inc. Wal-Mart Stores Inc. McDonald's Corp.

New York Times/J. Emilio Flores for The New York Times - By building warehouses across the country, like this one in San Bernardino, Calif., Amazon hopes to cut as much as a day off its two-day shipping ti more mes. less

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PATTERSON, Calif. At the moment, it is little more than dirt and gravel. But a sunbaked field at the edge of this farming town will play a significant role in one of the most ambitious retailing ventures of the era: the relentless quest by the online mall Amazon.com (AMZN) to become all things to all shoppers. A million-square-foot warehouse stocking razor blades and books, diapers and dog food will soon rise on this spot, less than a mile from the highway that will deliver these and just about every other product imaginable to customers 85 miles away in San Francisco. It is hundreds of miles closer to those consumers than Amazons existing centers in Nevada and Arizona. A similar distribution center is being built on the outskirts of Los Angeles. Others are under way in Indiana, New Jersey, South Carolina, Tennessee and Virginia. This multibillion-dollar building frenzy comes as Amazon is about to lose perhaps its biggest competitive edge that the vast majority of its customers do not pay sales tax. After negotiations with lawmakers, the company is beginning to collect taxes in California, Texas, Pennsylvania and other states. But Amazon hopes that the warehouses will allow it to provide better service, giving it the ability to up-end the retailing industry in an entirely new way.

Amazon will soon be able to cut as much as a day off its two-day shipping times, said Jeff Bezos, its chief executive, in an interview. This will put the much-rumored same-day delivery the elusive aspiration of every online merchant potentially within reach in some metropolitan areas. We want fast delivery, Mr. Bezos said. At a minimum, we can work on making it the next day. It is a monumental bet, even for a company that consistently defied skeptics on Wall Street and Main Street as it rose to become one of the countrys largest retailers. Amazons delivery of everyday objects needs to be fast enough and cheap enough to wean customers from their local stores. Yet it also must be economically feasible for the retailer, which is investing so heavily in the warehouses that it is barely profitable. If Amazon can truly deliver on its ambitions, said Sucharita Mulpuru, an analyst at the research firm Forrester, it will be the dominant retailer in the decade to come. Amazon will begin collecting sales tax in California on Saturday. Local merchants have been waiting for this day for more than a decade. Now that it has arrived, though, they are tempering their joy at the companys apparent surrender. Amazon is so aggressive on so many fronts, said Amy Thomas, the owner of three Pegasus stores in the East Bay of San Francisco that sell new and used books as well as magazines. Its hard to keep putting out fires everywhere. They sell e-books. Theyre becoming publishers. And now they want to do same-day shipping. Theyre an octopus. Despite the attention that Amazons technology receives its latest e-readers were introduced last week to the usual fanfare the majority of its sales are old-fashioned three-dimensional objects. The companys retail sales in the United States are on track this year to be roughly comparable to those of enterprises like McDonalds, Sears and Safeway. And while its sales are only about 12 percent that of Walmart, the reigning retail kingpin, they are increasing much faster. Amazon is the giant sucking sound in retail, said Colin Gillis, an analyst at BGC Partners. But the company, he added, is switching to an untested game plan: They have to hope that same-day delivery will offset the price advantage they no longer have. Since the companys founding, Mr. Bezos held on tightly to a 1992 Supreme Court decision that said mail-order merchants did not have to collect tax in states where they did not have physical operations. (Consumers were supposed to pay a use tax directly to the state, but few did.) The original justification for this de facto tax exemption was that the Internet ought to get some growing space, said Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities. Amazon collecting the tax in California, the birthplace of the commercial Internet, says that the Net can compete on a level playing field with traditional retail.

Amazon executives maintained that the sales tax exemption was not much of an advantage. Its regulatory filings told a different story, noting that collecting taxes could decrease our ability to compete. California retailers, particularly a handful of remaining independent booksellers, would love to see a dent in Amazons business. Oliver Wendell Holmes said taxes are the price of civilization, but Amazon did not want to pay, said Michael Barnard, president of the Northern California Independent Booksellers Association. Booksellers concede that Amazon, which offers a flat annual rate for fast shipping to encourage frequent orders, is still likely to be cheaper even when it collects taxes. The most Mr. Barnard can hope is that Amazons notoriously low margins it makes little more than a penny for every dollar in sales will eventually catch up with it. Same-day delivery is very, very expensive, he said. States began aggressively asserting that Amazon should collect taxes in 2008, when New York passed a law compelling the company to do so. Amazon is challenging the law in court but is collecting the tax for now. The biggest battle was fought last summer in California after Gov. Jerry Brown signed a measure that widened the definition of physical operations to include marketing affiliates. The company initially tried to put the law on the ballot but ended up striking a deal with the state to put two warehouses in California, including the one here, in exchange for a years exemption from tax collection. Amazon started collecting taxes in Texas this summer, and in Pennsylvania on Sept. 1. New Jerseys turn will come next summer, and several other states over the next two years. The company seems to be surrendering on the tax issue mostly in those states where it sees strategic value in new warehouses. Company officials say they hoped to see a national sales tax law in place that will supersede state laws. The Patterson warehouse, which might employ as many as a thousand people, is supposed to open by mid-2013. Local officials were eager to land the project; the county has 15 percent unemployment. Some residents want more. They want to be able to order something and then drive down the street to the warehouse and pick it up, said Rod Butler, the city manager. Here, just like everywhere else, shoppers dream of same-day delivery. Nick Bilton contributed reporting from Santa Monica, Calif.