Tax & Accounting Blog

How Retail’s Evolution Impacts Tax Nexus, Amazon Edition

Blog, Indirect Tax, ONESOURCE, ONESOURCE Indirect Tax November 8, 2017

Amazon’s acquisition of Whole Foods this summer was a useful example of how changing consumer preferences can introduce new complexities for tax teams.

While it isn’t entirely obvious what Amazon will become over the long term, it’s somewhat clear why Whole Foods was an attractive acquisition target for the storied retailer now. There are, in our estimation, three dimensions to this that bridge back to Amazon’s appetite to own more square footage of physical retail space, which affects the company’s tax nexus in unique ways.

First, like Amazon’s consumer businesses, Whole Foods turns around inventory quickly. Not only do both companies occupy top spots in retail verticals and have a similar base of loyal, enthusiastic customers, they also seem to do business in similar ways already. Culturally, the fit seems strong.

Second, Amazon is a data-driven retailer, making up for razor-thin margins with gigantic market share that it obtains by knowing what customers will buy before they know they want it. There are signals that Amazon wants to leverage and grow its data assets in physical locations as well as online.

It recently filed patents, for example, on technologies that would prevent users’ phones from visiting certain websites while they’re in its stores, presumably to guard against showrooming. It is piloting convenience store technology that sees what items customers are removing from the shelves and charges their account when they leave, eliminating the need for not only cashiers but also for checkout kiosks of any kind.

In-store monopolies and checkout-free stores: These kinds of advancements point directly to evidence of the evolving storefront. Which relates to the broader point: Amazon needs physical locations now.

The “last mile” logistics challenge familiar to any online retailer that relies on quick shipping and strong customer service requires the precise real estate Whole Foods has: relatively large stores in primarily metropolitan, high-income areas. Many observers expect the Whole Foods retail locations to double as hubs for all kinds of physical goods delivered through the vast Amazon ecosystem.

This has a direct impact for tax because there’s frequently a different tax treatment for orders that customers place online but pick up in stores than for transactions completed entirely online.

This deal, and the high degree of likelihood that Amazon will snatch up other struggling retailers to compound existing network effects and achieve yet greater dominance over basic commerce, will extend Amazon’s nexus.

It is arguable whether Amazon has a “physical presence,” as nexus requires, in states where its sellers live or in states where its servers are or (later) it states that its delivery drones fly through. But, assuming the company begins using the grocery locations in a strategic way that complements its other retail offerings, it will be plainly obvious that there is nexus.

That nexus will change Amazon’s omnichannel approach from a tax standpoint and it will therefore affect how smaller retailers compete with the behemoth.

“With Amazon’s nexus extended and taxes applying where they generally have not applied before, the door will be open, even if ever so slightly, for other retailers to once again compete, both online and offline, particularly during high-volume retail periods when customers are most malleable,” I wrote in the September edition of Tax Executive. “Portions of market share may come down to which company can best interpret the complex web of indirect tax regulations and strategize most quickly using that information, and customers could find a positive in-store experience enough to lure them out of their homes and become less dependent on Amazon Prime.”

In other words, this issue matters not just to online retailers or retailers looking to compete with Amazon. It matters to retailers everywhere.

This post is an adaptation of our whitepaper “How retail disruption is changing the mandate for transaction tax compliance,” accessible here.

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