Move over, Wal-Mart

Rivals are learning the hard way why Amazon is the next retail king

Move over,  Wal-Mart

Emmanuel Dunand/AFP/Getty Images

“Amazon,” one Morgan Stanley analyst proclaimed recently, “is the Wal-Mart of our era.” The Seattle-based e-commerce giant is expected to report revenues of US$49 billion this year, an eye-popping 43 per cent year-over-year increase that beats Wal-Mart’s memorable 1991 performance, when it registered $44 billion in revenues and a 35 per cent increase over the previous year.

The world’s largest online retailer has also managed gargantuan growth without the bad publicity that earned its bricks-and-mortar cousin the epithet of “evil empire.” But try to get between Amazon and its bottom line, and you’ll see the company’s Darth Vader side. Governments and competitors who’ve tried to out-muscle it recently are finding a surprisingly feisty, shrewd business with a special knack for getting what it wants.

Take Amazon’s latest squabble over sales taxes. Faced with gaping budget holes, many U.S. states are trying to force online retailers to collect sales taxes, closing a loophole that’s existed since a 1992 U.S. Supreme Court decision ruled e-commerce companies have no duty to charge taxes in jurisdictions where they don’t have a physical presence. Those tax-free online purchases amount to as much as $11.4 billion in cash lost to state coffers, according to the Council of State Governments, a non-profit professional association for state legislators. And much of that money comes from purchases made through Amazon, according to Sujit CanagaRetna, senior fiscal analyst at the CSG. But even with the recession inspiring unprecedented determination among state legislators, no one has been able to bend Amazon.

When Texas last year sent it a $269-million bill for four years of uncollected taxes, Amazon threatened to shut down its warehouse in the state, a move that would have shed around 119 jobs. Earlier, Amazon had said the warehouse was not a retail subsidiary. Less than four months later, Texas backtracked. In June the company offered to invest $300 million in new Texas warehouse and distribution centres that would add some 6,000 jobs, provided it can avoid collecting taxes for another 4½ years.

Others have tried to go after Amazon by targeting in-state affiliates of online retailers—individuals and businesses who collect a fee for directing customers to e-commerce companies with links to their websites. The trick, originally devised by hard-nosed former New York governor Eliot Spitzer, is the weapon of choice for a number of states, including California, which used it in a new law that became effective on July 1. Amazon has been fighting back with lawsuits, and, in some cases, cutting off all contact with affiliates, which account for only eight to 20 per cent of sales on online retailers’ sites, according to Forrester Research analyst Sucharita Mulpuru. In California, Amazon is even collecting signatures for a referendum to challenge the state’s recent legislation next summer.

Tax collection obligations would eat into Amazon’s price advantage and, most importantly, they would spoil its user experience by requiring customers to calculate the amounts they owe to their state every time they buy online, says Ben Bajarin at Creative Strategies, a Silicon Valley consulting firm. In the early days, Amazon’s founder Jeff Bezos was so determined to avoid this that he considered basing the company on a California reservation. He eventually settled for Washington, a state with a small population. And in a rare peek into the company’s corporate practices, a recent Wall Street Journal report revealed Amazon has handed staff travelling through the U.S. a list labelling states “safe” or “bad” according to the jurisdictions’ stance on online sales taxes. Employees entering “bad” states would be told to avoid making sales pitches and other behaviour that could be construed as constituting a link between Amazon and the state, triggering tax obligations.

The Seattle company has been just as shrewd in sidestepping another type of toll: the so-called Apple tax. Last week, it released a new Web-based application that allows it to sell digital books on mobile devices without sharing revenues with Apple, which usually takes a 30 per cent cut on every purchase made through an app distributed by its hugely popular App Store. The new Amazon app, called Kindle Cloud Reader, allows users to download books they can later read by simply accessing the Web—no need for middle-men like Apple. Amazon is prominently pitching the Cloud Reader to iPad users. Those who’ve tried it on the tablet say it works as well as Apple-vetted apps.

Amazon wasn’t the first to circumvent Apple’s store with a browser-based app, but it has set an example for other major sellers of digital content. That amounts to “knocking down Apple’s walled garden,” wrote Richard MacManus on ReadWriteWeb, a technology blog. The Cloud Reader also allows Amazon to handle purchases through its own digital storefront, in which the company invested considerable research and resources, says Creative Strategies’s Bajarin. And tellingly, he adds, the Cloud Reader is designed to work on any tablet, including the one many analysts rumour Amazon is going to launch in October.

For now, it seems, the force is clearly with Amazon.

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