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February 3rd, 2008


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01:17 am - Internet Sales Tax issue: Credit Card Transactions
On Friday, we had an All-Hands meeting, which is a quarterly presentation of all the cool things that have been done, highlights some sections of the operations, and then has a live Q&A with Bezos and staff. I can't talk about much of it. But one thing Bezos mentioned that I felt was novel enough to warrant public exposition. I am pretty sure it is not proprietary, and indeed, I suspect they would be happier if people knew about it.

The question was about sales tax. Amazon charges it, where appropriate. For instance, this makes shopping on Amazon less appealing now that I'm a Washington-based shopper; Washington has a 9.8% sales tax. Bezos is not opposed to states receiving sales tax income from businesses that operate within their state, and I guess I agree -- the income loss would have to come from somewhere, because as connectivity increases, any business would be at a competitive disadvantage not to offer an online-sales option (imagine standing in a shop, clerk with merchandise in hand; you pull out your phone, make a transaction, and the clerk hands you your new purchase).

OK, so what is the Amazonian beef with sales tax? Credit card transactions.

As you probably know, when you pay for something with your VISA, MasterCard, AmEx, etc... the merchant does not receive the whole payment. Depending on the merchant relationship (volume, etc) and your particular instance of card, the difference may be 1-3%, plus a per-transaction fee. PayPal's fees expose this concept nicely. Merchants put up with this fee, because it typically means a better customer experience (and we tend to spend more with plastic than cash). Tight margin businesses like McDonalds held off for years, and is now extremely happy to take your plastic; Costco only accepts AmEx, who they have a special exclusive relationship with.

But the problem with sales tax on a credit card transaction is that the credit cards' piece is taken out of the whole pie.

If you buy a $100 item, VISA might take $2 and so the merchant grosses $98.

If you buy a $100 in a 7% tax environment, you pay $107. VISA takes $2.14 and the state is owed $7. The merchant grosses $97.86.

Big deal? Working at Amazon, you continually get a new appreciation for large numbers. Back of the envelope math (no real numbers used!):

Amazon had over $15B in revenue last year. Let's assume 60% of that was credit card transactions. Of that $9B, let's assume that 33% of that was a sales taxable transaction. Let's also assume the average sales tax is 6%. $3B in sales taxable transactions produces $180M in sales tax revenues. Let's assume a 2% fee average for credit cards. Of that $180M in sales taxes produced through credit card transactions, Amazon paid the credit card companies $3.6M.

That's not nothing, and most of those assumptions are very conservative. And it is certainly not Amazon specific -- this applies for all retailers. Starts to make the credit card companies' business look even better, no?

(2 comments | Leave a comment)

Comments:


[User Picture]
From:gustaf
Date:February 3rd, 2008 07:09 pm (UTC)
(Link)
I've never really understood why credit card companies keep getting a free ride. The credit card was a pretty decent innovation, and I'm certainly glad it was profitable to make my life more convenient, but it's getting a little silly. I'm guessing that a .01% transaction fee is all you need to keep the infrastructure running. Credit transactions are so ubiquitous that the 1-3% fee is looking more and more like a sales tax, except it's not going to a government and isn't turning into anything useful for anybody.

Maybe if the credit card companies weren't always bribing consumers with kickbacks (miles, cash back, etc.) we'd care more. Not that I have a solution - government-issued credit cards sound terrifying in so many ways.
[User Picture]
From:mcfnord
Date:February 3rd, 2008 07:49 pm (UTC)
(Link)
look good? it looks illegal!

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