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The Amazonian Prime Directive

Way back in the early nineties, pundits who really didn't know very much predicted that online shopping wouldn't really take off because "people wanted that human touch." Anyone saying that has obviously never shopped at the Duane Reade near my dormitory. The managers are generally unfriendly. The store layout seems to have been designed with ineffeciency kept constantly in line: big signs instruct customers to "FORM ONE LINE PER CHECKOUT AISLE," an instruction that customers ignore to a man because to do so would actually prevent other customers from getting to the aisles. And the sales assistants, despite not showing any interest in talking to you, indicate that you are privileged to bathe in their noble presence, and any extra second that you do so is obviously your extreme joy. Hurry, therefore, is not in their nature.

The Rite-Aid is no better, so as you might expect, I'm willing to expend a certain amount of effort in order to avoid getting household goods there. Oddly, Amazon Prime has now provided me a way.

I'm mystified by how Amazon Prime is supposed to make money for Amazon.com. For a flat fee of $80, I get free two-day shipping on everything sold by Amazon (though not their marketplace sellers or other company stores within Amazon, like Target or Toys 'R Us). This doesn't sound like much until you realize what a broad range of products Amazon sells these days.

For instance, in the last 48 hours, I've purchased most of the household goods that I normally buy at Duane Reade: shampoo, bath products, chapstick, deodorant, batteries, facial tissues, etc. (Note: buying or looking at condoms causes the "Your Recommended Products" section to become more interesting than you may desire.) Looking over old Duane Reade receipts, the prices aren't that far off: a reasonable amount of bargain shopping shows that most of my purchases have a pre-tax price within +/-10% of bricks-and-mortar stores, better if something's on sale. (This is probably less true if you don't live in a high cost big city.) Items that I never would have ordered online because of the shipping (Q-tips, for instance) are now available to me, and I can buy items in bulk or in sizes not available at my local store.

It's a strange new experience, and if it works for Amazon, it looks to completely change the way I shop. I would have saved money in shipping simply through my normal purchase pattern, but now I'm looking at smaller, more trivial goods. It raises some major questions for me:

How is Amazon making money on this? Or rather, how did Amazon get its distributors to agree to this? I've tracked the packages every so often over the last few days, and they've been coming from all over America, usually via UPS. Instead of grouping products in the smallest number of packages possible, orders are being split into multiple boxes from multiple distribution sources. Surely on low-margin goods this is suicide?

How did Amazon get its marketplace and associate firms to agree to this? Or at least, are the other firms going to revolt? Even if Amazon charges a bit more than some of their associates, very rarely will the price difference be less than the shipping fee. At the moment, it's not easy to shop only from Amazon. For instance, if I do a search for Kleenex, I get offers from several different stores, and it's not immediately obvious which one I need to click to get free two-day shipping. This is a bit of a frustration, but the interface has gotten easier in only the last few days. (Besides, if you take "amazon" to the end of your search string, most of the items you get will be Amazon Prime material.)

The result has got to be a gradual cannibalization of partner sales, at least for partners whose product line largely matches Amazon's. If this becomes big, aren't partners likely to leave in droves?

Am I going to get in trouble?: I said the prices were competitive. What I forgot to say was that pricing was competitive for many of the items I buy before sales tax. On the other hand, Amazon hasn't charged me any sales tax on any of these goods: a frequent problem with online purchasing.

I'm not clear on the law in this area, but I'm dimly aware that I'm probably supposed to report all my purchases to the state of New York and send them a check. The thing is, I have no idea where I'd go to figure out what I owe or where to send it. I really wouldn't mind if Amazon reported it all to New York, who then sent me a bill, and I know that states haven't strictly enforced any such rule in a while. But given the significant amount of my income (well, loans) that will now be crossing state lines, will that change?

I don't know. What I do know is that my first consignment just arrived, and it is wonderfully convenient.


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NY state tax forms have a chart for how much you should add for internet sales taxes. Happily for those working part of the year, it's based on income...as I recall, I added less than $20.
All very interesting. I suspect you're right, in that Amazon are not going to make money on this. But Amazon have never made money on anything *right from the start*, all their successes have been slow burners. Lose money for three years while you build a customer base - then start adding the dollars. It was about 2001 before they started making money on books. The company kept making losses for a while after that because they were still trying to gain market share in other areas. So in three years time Amazon will have a million or so people doing their grocery shopping and such online and then they'll build the logistics system they need to support them. Or they'll have *not enough* people buying this stuff online and they'll drop it. Or Amazon expect to charge lots of people $80 and then not have them use the system, kind of like gym membership fees. If you really care there's probably something about it in a quarterly report or something.
I'm with Alison. Most state departments of revenue require you to declare purchases that were bought in such a manner that they were not initially subject to state sales tax. However, providing that you don't buy a car on Amazon Prime, you shouldn't have anything to worry about. If you prepare your taxes using Turbo Tax (or similar software), I am positive that they will prompt you for all of the necessary information. Save your receipts, I guess.
The hazard of TAing ConLaw. How can New York tax interstate commerce? I'm pretty sure that's why you don't get charged sales tax on internet purchases from companies that don't have a physical presence in the state in the first place. See, if they had a store, then that would be intrastate commerce, but as it is, anything you buy from Amazon is interstate commerce and thus beyond the reach of New York state. I may use this for a practice exam question.
http://www.tax.state.ny.us/pit/income_tax_2004/it-200_use_tax.htm You're right! They are charging tax on stuff you order from out of state! One more good reason to move back to California. How is that legal?
Yeah, Quill v. North Dakota said that mail-order companies had to have an in-state store to be taxed, but also concluded, "This aspect of our decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions. See Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946). Indeed, in recent years Congress has considered legislation that would "overrule" the Bellas Hess rule. Its decision not to take action in this direction may, of course, have been dictated by respect for our holding in Bellas Hess that the Due Process Clause prohibits States from imposing such taxes, but today we have put that problem to rest. Accordingly, Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes." More on NY and online taxes.

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