Tuesday, July 26, 2011

Amazon in the City

The Wall Street Journal reports on some interesting urban economics related to Amazon having to pay state sales tax and the consequences of this tax regime shift on where it locates its warehouses.   Back in 1999, an economist named Austan Goolsbee (have you heard of him?) wrote this paper whose abstract tells the story;

"The rapid rise in sales over the Internet and the fact that most Internet buyers pay no sales tax
has ignited a considerable debate over taxes and the Internet. This paper uses new data on the
purchase decisions of approximately 25,000 online users to examine the effect of local sales taxes on
Internet commerce. The results suggest that, controlling for observable characteristics, people living in
high sales taxes locations are significantly more likely to buy online. The results are quite robust and
cannot be explained by unobserved technological sophistication, shopping costs, or other alternative
explanations. The magnitudes in the paper suggest that applying existing sales taxes to Internet
commerce might reduce the number of online buyers by up to 24 percent."

So, does Amazon have a big problem in its showdown with Downtown Gov. Jerry Brown in California and other high sales tax states such as Illinois?  Jerry Brown wants Amazon to pay its share of sales taxes to reduce the state's deficit.  A big fight on this issue is brewing.

Here is a quote from the WSJ;

"But collecting sales taxes nationwide could have benefits. Amazon places many of its warehouses outside high-population states and away from major urban areas. Analysts believe it does this to avoid establishing a business presence that would force it to collect taxes in a state. One warehouse in Nevada, for example, by the California border, serves the Golden State.

If it starts collecting sales taxes, Amazon could build warehouses in or just outside major cities. The result: potentially lower shipping time and costs. That is important for a company that had operating margins of just 3.3% in the year's first quarter. It may also allow the company to pursue other opportunities, like a textbook-rental-by-mail service."

Amazon will stop tax arbitraging and will start to tradeoff classic urban forces between land prices and transportation costs to final consumers.  How much will Amazon's carbon footprint shrink by if it locates warehouses near the "home markets"?  How much has the tax code been influencing where Amazon sites its warehouses and how inefficient have these "rational" choices been in terms of logistics for consumers and resulting carbon emissions?