02 November 2011

Indirect Revenue

I’ve been writing quite a bit recently on indirect taxation, and I thought that I would take a minute to look at things from the opposite side of the fence as it were.  First, some context for my thoughts:

The state of Connecticut passed a new Internet tax law and contends that Amazon had a physical presence because it had affiliations with websites through its Amazon Associates program. Of course, Amazon dropped the Associates program in Connecticut to avoid having to collect the sales tax or fight that contention. In fact, the same scenario took place in California this year – so Amazon dropped its California Associates program to opt of that government scheme. The headhunting tax thieves from so many states are so focused on getting Amazon, this has come to be known as the “Amazon Tax.” Theft-seeking bureaucrats are fond of supporting their schemes as a logical move to combat an “unfair advantage” that they say online retailers have over brick-and-mortar retailers.

Many people generally only think about the direct taxes they pay when considering alternative tax policies (this being, of course, a form of the broken window fallacy).  The same mindset is found in bureaucrats who, contrary to popular belief, are actually human.

Bureaucrats get excited about finding new ways to increase tax revenue, as was seen above with Amazon.  They found a new way to charge taxes, or so they thought.  There models assumed that Amazon would simply comply because they would not want to forego the extra profits found by selling through their associates in that state.  Unfortunately, Amazon’s margins are pretty thin.  So thin that, as Karl Denninger has observed, collecting sales tax will kill their competitive advantage.  Thus, not having any business sense or, apparently, access to financial reports, Connecticut decided to charge Amazon sales tax because it had associates in the state.  Amazon cut ties in order to avoid paying taxes.

As is readily obvious, Connecticut won’t be seeing the increase in tax revenue it’s expecting. But they should also see a drop in revenue from the income tax because associates are now not earning anything from being associates, and will therefore pay less.  Some may even move out of state if being an associate was their main job in order to recoup their lost income.  There should also be negative repercussions on sales tax revenue, since former associates will likely spend less money.  Astute readers will note that this is basically the money multiplier effect being negatively applied to taxes.

What’s astonishing is a) how bureaucrats thought there was not a single chance that Amazon wouldn’t pay the new tax and b) how bureaucrats failed to account for the possibility of Amazon dropping the program.  Quite simply, it is amazing how bureaucrats apparently did not even contemplate how their tax policy has indirect effects on other tax revenue.  Their stupidity is simply astonishing.


  1. "how bureaucrats thought there was not a single chance that Amazon wouldn’t pay the new tax"

    It never fails to boggle my mind that they do this. And do this everywhere...it is as if they lack the mental flexibility to get away from "static scoring". They assume that companies don't have choices as to where they do business, just like people have choices as to where they live. Life is dynamic. I wish these pols would realize that.

    Take Boeing for instance. I would be inclined to take my manufacturing to Canada or somewhere else were the NLRB to rule against my company like that.

    Another example would be the recent kerfuffle about Jack Daniel's. Seems Lynchburg Tennessee is coming after them for more tax money. What is keeping JD in Lynchburg, other than PR reasons? Do government officials seem to think they can kill the geese that lay all these golden eggs?

  2. "Unfortunately, Amazon’s margins are pretty thin. So thin that, as Karl Denninger has observed, collecting sales tax will kill their competitive advantage."

    I haven't asked Karl this, but I don't understand why sales tax collection will impact their margin at all.

    When I sell items at retail, or online to someone here in Washington, I have to collect sales tax. It's above and beyond the price of the item, so by definition it can't touch the margin.

    For all intents and purposes, it's simply a passthrough. Sure, there's some amount of cost due to compliance, but that wouldn't account for the doomsday scenario Karl predicts for them.

    Don't get me wrong, I think it's a stupid and unconstitutional idea, but I don't think it'll hit Amazon at the margins.

  3. @EW- the problem isn't relegated to just bureaucrats. Many mainstream economists assume stasis in their models (for simplicity's sake). In fact, my Econ prof. told to assume stasis. I think the problem is endemic to most economic forecasters. Of course, the mistaken assumption is still idiotic.

    @Rudy- I think sales are the big concern for a lot of items. Amazon is basically competing with low-cost retailers (e.g. Walmart) for discount items. Say Amazon offers a lower nominal price. Once you factor in shipping and sales tax (plus an increased cost to cover sales tax compliance, it may actually be cheaper to buy in-person instead of on-line. So, sales tax will affect Amazon's sales numbers, not their margins. Reduced sales means that they will have to increase margins to cover fixed expenses.