In 1992, when the Supreme Court adjudicated a dispute over sales tax between Quill Corp., a Delaware mail-order office-supply company, and the state of North Dakota, it inadvertently altered the future of e-commerce. The Court ruled that mail-order companies did not have to collect sales tax on customers in states in which they had no physical presence. At the time, the World Wide Web wasn’t even a year old, but this new loophole would lend a massive competitive advantage to Amazon.com when it was founded two years later.
As Amazon grew from an online bookseller into a retail behemoth, it built new distribution centers according to a plan that minimized the number of customers to whom it had to charge sales tax, thereby keeping its products cheaper. During this first phase, it clustered warehouses in Kentucky, which was near the UPS Worldport, its primary hub, and mostly placed the rest in small and low-tax states. When it came time to expand, Amazon moved mainly into states willing to temporarily exempt it from collecting sales tax on their citizens. When states didn’t cooperate, Amazon wasn’t afraid to play rough: The company ceased construction in South Carolina and pulled all job listings until lawmakers in Columbia agreed to a sales-tax exemption.
The Marketplace Fairness Act, a bill that would allow states to collect sales tax on all online sales, was first introduced in Congress in late 2011. (It has yet to pass, but has bipartisan support.) The following year, Amazon finally began to enter the populous states it had once strenuously avoided—suggesting a radical rethinking of company strategy. Industry observers now speculate that Amazon is ditching a nearly obsolete competitive tax edge for a new one: same-day delivery in a number of key markets, like San Francisco, Los Angeles, Dallas–Fort Worth, and New York City. It’s an expensive wager. If it fails, Amazon will join a short list of businesses that have lost money going long on Americans’ love of convenience. But with its tax-free days waning, it seems a bet it had to make.1
Phase 1 1997 – 2007
Minimize sales-tax collection by building in small and low-tax states.15 6.5% 3 12,891,624 Total warehouses and distribution centers Share of U.S. population to which Amazon must charge sales tax Major cities within 50 miles of a warehouse or distribution center Total population of those nearby major cities 1997 New Castle, DE 1999 Campbellsville, KY; Coffeyville, KS; Fernley, NV 2000 Lexington, KY (1) 2005 Hebron, KY (1); Hebron, KY (2); Louisville, KY; Shepherdsville, KY (1); Shepherdsville, KY (2) 2006 Lexington, KY (2) 2007 Bellevue, WA; Hebron, KY (3); Nashua, NH; Phoenix, AZ (1)
Phase 2 2008 – 2011
Expand into states that are willing to cut tax deals.36 6.6% 4 19,234,271 Total warehouses and distribution centers Share of U.S. population to which Amazon must charge sales tax Major cities within 50 miles of a warehouse or distribution center Total population of those nearby major cities 2008 Hazleton, PA; North Las Vegas, NV; Phoenix, AZ (2); Plainfield, IN (1); Whitestown, IN 2010 Breinigsville, PA (1); Carlisle, PA (1); Carlisle, PA (2); Lewisberry, PA; Phoenix, AZ (3); Sterling, VA 2011 Breinigsville, PA (2); Cayce, SC; Charleston, TN; Chattanooga, TN; Indianapolis, IN; Lebanon, TN; Phoenix, AZ (4); Plainfield, IN (2); Shepherdsville, KY (3); Sumner, WA
Phase 3 2012 – Beyond
Compensate for slipping price advantage by gaining proximity to big cities.57 62.4%2 11 80,517,571 Total warehouses and distribution centers Share of U.S. population to which Amazon must charge sales tax Major cities within 50 miles of a warehouse or distribution center Total population of those nearby major cities 2012 Chesterfield County, VA; Dinwiddie County, VA; Jeffersonville, IN; Lebanon, TN; Middletown, DE; Murfreesboro, TN; San Bernardino, CA; Spartanburg, SC 2013 Coppell, TX; DuPont, WA; Haslet, TX; Patterson City, CA; Schertz, TX; Tracy, CA 2014 Unknown, CT; Robbinsville, NJ; Woodbridge, NJ (1); Woodbridge NJ(2)