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Is Amazon Too Big to Tax?
The e-commerce giant paid zero federal taxes in 2017. And it’s being rewarded with further tax breaks at the state and local level.
March 1, 2018
This year, like every other year, is shaping up to be a triumphant one for Amazon. It is on the cusp of becoming the first trillion dollar company ever. In the coming months it will announce the opening of a second headquarters—and likely bank billions in tax breaks and other incentives from the lucky city it chooses to grace with its presence. The company’s founder and CEO Jeff Bezos will continue to be the richest person in the history of the world. Amazon will continue to grow at a rapid clip, gobbling up e-commerce market share and posting staggering revenues. It will even post profits. And it will pay next to nothing, and possibly nothing at all, in federal taxes.
Earlier this week, Matthew Gardner of the Institute on Taxation and Economic Policy reported that Amazon, which recorded $5.6 billion in profits in 2017, paid zero in federal taxes, thanks to “various tax credits and tax breaks for executive stock options.” That’s remarkable in isolation, but especially remarkable when you consider that Donald Trump’s corporate tax bill hadn’t even gone into effect; Amazon projects it will get an additional $789 million in benefits from the passage of that bill. And it’s even more remarkable given that Amazon was already paying a much lower rate than other companies. The tax bill may have cut the corporate tax rate from 35 to 20 percent, but Amazon had paid only an 11 percent rate over the previous five years, meaning that “the company was able to shelter more than two-thirds of its profits from tax during that five-year period,” Gardner wrote.
Tax avoidance is not new to Amazon. “More so than any company I can think of,” Gardner told me, “Amazon appears to have built their profit maximization strategy around avoiding taxes at various levels.” Amazon has used local, state, and federal tax laws to its benefit, while doing everything in its power to avoid posting profits. (The stock market rewards the company anyway, as it uses its low-profit strategy to decimate competitors and swallow up industries.) It’s reached the point where Amazon, over the past few years, has made an effort to pay some tax—largely, it seems, to avoid bad press.
The fact that it paid a zero percent rate in 2017 comes at an awkward time. As Amazon forces cities and states to offer it tax breaks for its new headquarters, combined with the hundreds of millions of dollars it will rake in next year from the tax bill, the company has become an outlier in the fierce competition to game the system, snatching the crown from Apple to become the country’s most prominent tax grifter. It has done this by being aggressively innovative, but it has reached a new stage in which it has become too successful—too big, if you will—to tax.
Exploiting tax loopholes is one of Amazon’s most important long-term strategies. As Splinter’s Emma Roller noted earlier this week, Bezos initially wanted to build Amazon’s headquarters on a Bay Area Native American reservation in order to receive a generous tax break from California. The deal fell through and Amazon landed in Seattle, but the pursuit of tax breaks continued. For years, Amazon’s exponential growth was fueled by its refusal to collect state taxes on transactions—the company once distributed color-coded maps to staffers indicating which states they could travel to without attracting the attention of tax collectors. Amazon only began collecting sales tax in all 50 states in April of last year, 20 years after it went public.
Because it has rarely been profitable—Bezos’s strategy has been to reinvest money toward growth, rather than waste it on dividends or taxes—Amazon has largely been able to skirt large tax bills. A year ago, Scott Galloway ran the numbers and was troubled by what he found
The most disturbing stat in business? Since 2008 Walmart has paid $64 billion in corporate income tax, while Amazon has paid $1.4 billion. This is despite the fact that, in the last 24 months, Amazon has added the value of Walmart to its market cap. The most uncomfortable question in business, in my view, is how do we pay our soldiers, firefighters, and teachers if a firm can ascend to $460 billion in value (#5 in the world) without paying any meaningful corporate taxes.
This is quite a deal. Federal and state governments have essentially doled out tens of billions of dollars to Amazon, not to mention all the benefits the company and its employees reap (soldiers, firefighters, teachers, etc.) from being an American company. Despite this, Amazon has spent the past year going to localities around the country and asking for even more tax breaks.
In the first round of bidding, those localities delivered. Philadelphia offered $3 billion. Montgomery County, Maryland, offered $5 billion. Newark, New Jersey, offered $7 billion. While the second round of HQ2 bids have not been made public yet, Amazon has created a nationwide race to the bottom, in which cities offer billions in return for what can generously be described as a questionable return on investment.
Amazon’s federal tax avoidance is problematic for obvious reasons, but the federal government can do without the billions the company has not paid over the past 20 years. “It’s one thing for the federal government to delay or even forego entirely collecting taxes on profitable corporations,” Gardner told me. “But even as a one-shot deal, the prospect of state and local governments giving up billions of dollars of tax revenue has a real cost. It endangers the state and local governments to pay for services for the rest of us.”
Amazon received these generous bids because it would have been political malfeasance for mayors, governors, and other civic leaders to avoid playing ball—no one wants to be blamed for losing out on a chance at hosting Amazon’s headquarters. But, as Amazon’s federal tax avoidance schemes show, it’s not clear that cities and states will benefit. Yes, some economic development will follow Amazon. Yes, there will be an infusion of well-paid, non–tax-avoiding Amazon employees. But by effectively paying hundreds of thousands of dollars per employee, those benefits may be cancelled out. It’s quite literally a zero-sum game.
All of this points to the larger absurdity at the center of Amazon’s rise. In interviews, Jeff Bezos repeatedly touts Amazon’s ability to meet the needs of its consumers and to win over new ones. The company has been built, in his telling, on its relentless drive to put the customer first. And yet Amazon also takes from that very consumer. Despite being among the most successful companies of all time, Amazon still acts—and is still treated like—a young upstart in need of perks to grow.
Amazon has turned into a coddled behemoth. It will likely hit the one trillion dollar mark right around the time that it’s breaking ground on a second headquarters—a headquarters that it will effectively be paid to build. And it will celebrate the feat by paying a pittance in federal taxes.