Amazon’s Grocery Expansion: A Match Made in Sales-Tax Heaven

6/5/13Follow @curtwoodward

In Amazon’s hometown of Seattle, people are pretty used to the sight of bright green Amazon Fresh trucks zipping around the city, loaded down with containers and bags full of groceries delivered to their door.

Now it’s looking like folks in other cities might start getting a taste of Amazon’s grocery deliveries. And they’ve got a big war over sales tax policy to thank.

The e-commerce pioneer has been “testing” Amazon Fresh in the Seattle area for about six years, but has never expanded the service. The rumor mill about an Amazon Fresh expansion, however, has been very active.

Reuters turned up the volume on the latest round of speculation Tuesday when it reported that Amazon Fresh was set to begin offering grocery service in Los Angeles in the very near future, and San Francisco soon afterward. The news service cited unnamed sources, but similar reports have been surfacing regularly in recent months, making an expansion sound very plausible.

So what’s changed? Look no further than Amazon’s long-running dance with state and federal regulators over sales tax collections, which appears to be headed toward a finish.

For years, Amazon fought to hold onto a loophole in federal tax law that made it difficult for states to deputize retailers as tax collectors. In short, a retailer couldn’t be forced to collect sales taxes on purchases in a given state unless it had physical operations of some kind in that state.

It was a boon for Amazon and other remote retailers, who could use the lack of sales tax in most states as a way to lower prices. All the while, Amazon said it wanted an all-or-nothing approach: Change federal law to allow for an orderly national sales-tax collection system, or keep things just how they were.

But Amazon’s tapdance around local regulators started running out of steam in the past few years.

For one thing, the company was establishing warehouses in more places as it sought to improve shipping times. And state officials who saw their budgets ruined by the Great Recession were suddenly willing to challenge Amazon’s attempts to avoid collecting taxes even if it had a warehouse or other operation.

So, instead of fighting a losing battle, Amazon started cutting deals with individual states. Amazon now collects sales taxes in nine states, including California, New York, and Texas, and has deals in place with several other states, including Massachusetts, to begin collecting sales tax in the near future.

At the same time, Amazon has been pushing Congress to enact a national sales-tax collection system for online retailers. That bill is working its way through Congress now, with bipartisan support.

Which brings us back to grocery deliveries.

In the old days, Amazon couldn’t have claimed it was a remote retailer exempt from sales taxes when it also had a bunch of branded trucks racing around town dropping off groceries.

But now, with sales tax policy getting sorted out, the door is open for Amazon to set up handling facilities and the “last mile” delivery system needed to drop off produce, canned goods, and other household items. So if you live in a state where Amazon charges sales tax, it’s a decent bet that you might see Amazon Fresh grocery trucks in the future.

Of course, Amazon isn’t the only company to try online grocery shopping and delivery. There was the dot-com bubble flameout Webvan, and more successful recent efforts like Fresh Direct and Peapod. Traditional grocers like Safeway already offer online shopping and home delivery, too.

But even though it’s not a new market, competitors must be a little uneasy about Amazon getting into the game. The online retail giant is famous for operating on razor-thin margins at huge scale, and doesn’t mind losing money on services if it might increase sales in the long run (see Amazon Prime, the free-shipping membership service that Wall Street hated when it was introduced).

As Wells Fargo Securities researchers pointed to this strategy in a recent note to clients, Amazon’s unending universe of items for sale means the company “has the advantage of allowing customers to combine grocery orders with higher margin general merchandise … to improve profitability.”

And someone else should be wary of Amazon expanding its grocery delivery experiment: shipping companies.

If Amazon does indeed roll out Fresh in new markets, it can rightly be seen as a warning shot for UPS, FedEx, and smaller regional carriers. It might be wrapped in grocery-store branding, but Amazon Fresh is actually the e-commerce company building out its own delivery truck network.

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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