Amazon: Inventory Costs vs. Sales Tax

Source: Wired, Amazon Sets Up (Really Big) Shop to Get You Your Stuff Faster

Amazon has come to be known as a shopping place were customers have enhanced their buying experience. But Amazon’s strength and competitive advantage doesn’t rely on that aspect only, it also builds upon on a great supply chain model.

Recently, Amazon has built a colossal, million-square-foot distribution center an hour east of San Francisco. For many years Amazon avoided locating one of its warehouses in the state of California, mainly to avoid the requirement to charge customers the state sales tax, which has been an advantage this retail company has over traditional brick-and-mortar competitors. Thanks to a negotiation in 2011 among California’s Governor, Jerry Brown, and Amazon executives, the company was able to postpone until 2012 a new sales tax that affects online purchasing in exchange for a $500 million in investment located in California. Now, the investment has been fulfilled by building this massive warehouse and distribution center which will also bring full-time jobs and seasonal employees. It looks like a win-win situation for Amazon and for the state of California.

But why did Amazon prefer to translate the sales tax to their customers? Wouldn’t this additional cost affect its competitiveness and make Amazon lose market share to brick-and-mortar retailers?

The answer is NO, Amazon started collecting the sales tax in California on September of 2012 and the impact hasn’t been significant. A study from Wingo points out that one of the factors for not seeing an impact is because one third of Amazon’s total sales come from third-party sales which not all of them collect California’s sales tax (1). Instead, this deal has increased business for Amazon, due to the increased efficiency in its supply chain. The constant approach of bringing customers closer to their products has represented a more efficient warehousing management, where customer’s services are maximized and at the same time fewer inventory is stocked, which translates into fewer costs. Additionally, as stated on an analysis by Darden Business School, changing the transit times will allow a better planning of the product pipeline which allows better information to determine the correct times of handling and distributing products (2).

What weights more over Amazon’s strategy, having their inventory as close as possible to their clients or reducing the final price of the products through fewer taxes?

Is this Amazon’s strategy of bringing distribution centers closer to customers one which the company will also try to follow as it increases its global approach? Or in a global perspective and while doing business abroad other factors must be considered?

References

1. Wohlsen, Marcus. Despite Sales Tax Slap, Amazon Could Still Crush Brick-And-Mortar. Wired. [Online] January 18, 2013. [Cited: January 28, 2013.] http://www.wired.com/business/2013/01/amazon-sales-tax-california/.

2. —. California Governor Jerry Brown Approves 'Amazon Tax Compromise'. Huffington Post. [Online] September 23, 2011. [Cited: January 29, 2013.] http://www.huffingtonpost.com/2011/09/23/jerry-brown-amazon-tax-compromise_n_978287.html.

3. —. Amazon Sets Up (Really Big) Shop to Get You Your Stuff Faster. Wired. [Online] January 23, 2013. [Cited: January 28, 2013.] http://www.wired.com/business/2013/01/amazon-distribution-centers/?utm_source=Contextly&utm_medium=RelatedLinks&utm_campaign=Interesting.

4. University of Virginia, Darden School Foundation. Managing Inventories - Reorder Point System. s.l. : Darden Business Publishing, 2000. UVA-OM-0936.