Editor’s Note: Paul Rafelson is a tax attorney representing online merchants. He is an adjunct professor at Pace Law School in New York and the executive director of Online Merchants Guild. The opinions expressed in this commentary are solely those of the author.
If you were looking for proof that Amazon is leveraging its ever-expanding shipping and distribution capacity to clobber every last competitor and become the go-to seller of everything, here is some: The tech giant announced in April that Prime, its $119-per-year subscription service that offers unlimited two-day shipping on most orders, has surpassed 100 million members.
At the same time Bed Bath & Beyond, among the major retailers buckling under the online competition led by Amazon, saw its stock hit a nearly 10-year low in April.
How did Amazon’s delivery-on-demand subscription service get so big so fast?
The answer: taxpayer dollars and the decimation of our local economies.
State governments have diverted vast sums of money from local education initiatives, infrastructure projects and small businesses to help Amazon build warehouses, data centers and just about every other pillar of the Prime network.
After more than a decade of states fueling Prime’s expansion, helping Amazon pad its coffers and protecting its price advantage, it is time to explore whether the Prime shipping and distribution network should be open to all without fees.
Since it was launched in 2005, Prime has become the retail equivalent of the “Death Star,” capable of obliterating decades-old businesses. The platform is under the exclusive control of the Amazon empire, a remarkable feat for CEO Jeff Bezos, who cut his teeth on Wall Street. But while many like to attribute the growth of Prime to Bezos’ business acuity, the true story of its success is the unprecedented taxpayer support Amazon has gotten from all levels of government.
Prime was able to spring into existence because states and even the federal government allowed Amazon to be the exception to seemingly every rule. For example, the publicly subsidized US Postal Service had a rule that it would not deliver mail on Sundays – that is, until 2013, when Amazon cut a deal with the post office to get the Sunday delivery restriction lifted, at least for Amazon and Priority Mail Express parcels.
At the state level, Amazon has scored a staggering $241 million in subsidies since 2015, according to research done by Thomas Cafcas and Greg LeRoy for Good Jobs First, an advocacy group that tracks public subsidies. These have come in the form of property tax abatements, corporate income tax credits and, perhaps most importantly, sales tax exemptions.
States have justified these breaks by promising scores of jobs and sweeping economic development, just as they are doing now in telling residents that unprecedented corporate welfare for the tech giant’s planned second headquarters, HQ2, would be well worth it.
But the costs of this so-called economic development in Seattle, for example, have been enormous. Rents have gone through the roof and rates of homelessness have surged. In the 25 states where Amazon has opened fulfillment warehouses, promised job gains have not come to fruition – warehouse jobs increased, of course, after Amazon moved into town, but those gains were canceled out by losses to other local industries, such as retail.
Amazon long avoided collecting sales tax, which allowed the tech giant to sustain its unbeatable prices and crush competitors. Soaring revenues enabled the company to invest in a nationwide distribution network of warehouses, “sortation centers” and logistics facilities – without which there would be no Prime as we know it. Year after year, states missed out on billions in tax revenue. In 2016 alone, the sales tax loophole for online retailers cost states more than $17 billion.
Today, it might seem as though Amazon’s tax-dodging days are over, since the tech giant is finally collecting sales tax on items it sells directly to consumers, but it still claims an online marketplace exemption on third-party transactions, invoking the myth that it is merely an online mall.
In the past two years, Washington and Pennsylvania closed the loophole by passing marketplace tax collection laws. But Amazon retains its duty-free status in 43 states. South Carolinians can attest to the expensive damage to state coffers of cutting a deal with Amazon to allow the company to remain duty-free.
Amazon continues to add insult to injury by soliciting the offer of enormous tax breaks and other economic incentives from the cities vying to become the home of HQ2.
It is simply undeniable that the success of Prime has been fueled by a serious breach of the public trust, orchestrated by Amazon and enabled by state governments around the country. In some cases, states took money out of our pockets via subsidies and gave blank checks to Amazon. In other instances, they allowed Amazon to benefit at the expense of our local business economies by granting the tech giant an exemption from sales tax collection.
That is the real story of how Prime surpassed 100 million members, and it shows why the taxpayer-built service should be accessible to all without membership fees.