Amazon.com A History and Evolution of Business

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Amazon.comA History and Evolution of Business
TechnologySeptember 2008
Rich Prem V.P. of Indirect Taxes/Tax
Reporting Amazon.com richprem_at_amazon.com (206)
266-2708
Emmett OKeefe Director, U.S. Public Policy
Amazon.com eokeefe_at_amazon.com [phone]
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In The Beginning
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There was a Man
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a few books
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and a concrete floor.
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• On July 5, 1994 that man incorporated
• Cadabra, Inc.
• Cadaver, Inc.???
• New Name!
• Amazon.com, Inc.

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We have grown fast

• 1994
• Incorporated July 5, 1994 - Originally named
  Cadabra, Inc.
• 1995
• 11 employees
• Website launches mid-1995
• First warehouse opens (7,000 sq feet)
• 1997
• IPO completed
• 1 millionth customer
• 2008
• More than 70 million customers

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Our website has changed a lot over time
Then (95)
Now
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Outline

• Amazon.com an e-commerce technology provider and
  a retailer
• The online retail market
• Amazon Services
• Biggest challenges to sales tax collection
• Conclusion suggestions

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Amazon.coms Mission

• Earths most customer-centric company, where you
  can find, discover, and buy anything online.

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Overview of Amazons Businesses

• Amazons Service Business consists of the
  following programs
• Merchants_at_ and Marketplace
• WebStore by Amazon
• Fulfillment by Amazon
• Amazon Payments
• Amazon online retail business
• Amazon is the seller of record for a broad range
  of new products, including electronics,
  computers, kitchen and house wares, books, music,
  DVDs, videos, cameras and photo items, software,
  computer and video games, cell phones, tools and
  hardware and outdoor living items.

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Amazon Services Leveraging Technology
Investments (www.amazonservices.com)
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Amazon Services Leveraging Technology
Investments (www.amazonservices.com)
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Overview of Amazons Third-Party Seller Programs

• Amazons Merchants_at_ and Marketplace
• Allows other businesses and individuals to offer
  their new, used and collectible products for sale
  on Amazons web sites.
• Their products are fully integrated on Amazons
  web sites and are purchased by customers through
  a single checkout process.
• Amazon is not the seller of record in these
  transactions.
• Amazon is not responsible for fulfilling orders
  placed by the customer using the Merchants_at_
  programs.
• Amazon earns fixed fees, variable fees, per-unit
  activity fees or some combination thereof for the
  services that it provides to the third parties.
• Sellers who participate in the Merchants_at_ program
  are businesses, generally medium or large retail
  sellers.
• Sellers who participate in Amazons Marketplace
  program may be business entities or individuals,
  and some make only occasional, one-off sales,
  while others make regular sales out of their own
  inventory.
• Amazon Marketplace is available on
  www.amazon.com, www.amazon.co.uk, www.amazon.de,
  www.amazon.fr, www.amazon.ca, and
  www.amazon.co.jp.

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Outline

• Amazon.com an e-commerce technology provider and
  a retailer
• The online retail market
• Amazon Services
• Biggest challenges to sales tax collection
• Conclusion suggestions

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The Fragmented State of the Online Sales
Environment

• Highly Fragmented, a multitude of products being
  sold and business models used
• Millions of small sellers
• Thousands of search engines
• Hundreds of marketplaces beyond "Amazon,"
  "Craigslist" and eBay
• Hundreds of online shopping carts and payment
  tools
• Huge opportunity for small sellers to benefit
  from service providers economy of scale

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Online Sales Dominated by Multi-channel and Small
Sellers

• A significant portion of the Top 500 retailers
  are multi-channel.
• Retail chain nearly 40 percent
• Consumer brand manufacturers 14 percent
• Catalogue/call center 15 percent
• Web only sellers - just over 30 percent
• The current online market is largely comprised of
  two groups of sellers multi-channel retailers
  collecting sales tax in most states and a large
  group of small retailers with limited nexus.

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The Long Tail is Longer than You Think The
Surprisingly Large Extent of Online Sales by
Small Volume Sellers. (2008)

• Millions more small sellers than originally
  thought.
• Three Ranges of Seller Size
• Top 500 (Region I)
• Next 28,128 medium-sized Internet retailers
  (Region II) with revenues between 1 million and
  10 million dollars, and accounting for 29.9
  billion in annual sales.
• At least 5 million small sellers (a conservative
  number, defined as those too small to measure
  activities at a unique web site) collectively
  accounting for 65.4 billion in 2004 annual sales
  (Region III).

Source, University of Maryland Smith School of
Business
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Amazon Sees Opportunity in the Tail

• Amazon Services represents a significant
  investment in technology to help small sellers
  succeed online.
• Technology diminishes the importance of scale as
  small sellers compete on the basis of things such
  as the scope of products offered and service.

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Technology Allows Small Sellers to Use Ever-More
Sophisticated Tools

• Manage your inventory
• Automatically list and re-list items
• Automatically send feedback
• Monthly profit and loss reporting
• Free Listing Designer
• Print shipping labels and invoices in bulk
• Calculate shipping and taxes it just takes a
  few minutes to set up shipping costs, sales tax,
  or value-added tax. (Source www.paypal.com).

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Shopping Carts One Example of the Robust Market
for E-commerce Services
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Outline

• Amazon.com an e-commerce technology provider and
  a retailer
• The online retail market
• Amazon Services
• Biggest challenges to sales tax collection
• Conclusion suggestions

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Amazon Services Seller Tools
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How to Sell on Amazon 1
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How to Sell on Amazon 2
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How to Open Your Own WebStore
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Let Amazon Handle Shipping Fulfillment by Amazon
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Payment Services Checkout by Amazon 1
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Payment Services Checkout by Amazon 2
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Overview of Amazons Tax Services Offering

• Amazon's tax calculation engine ("tax engine")
  has been implemented to provide the functionality
  necessary to calculate US sales and use taxes for
  all fifty states (plus the District of Columbia)
  and thousands of related local tax jurisdictions.
• Number of tax enabled merchants selling on
  Amazon.com over 2,500, most are multi-channel
  retailers. Adoption has been slow amongst
  sellers with limited nexus.
• The tax engine does not support the calculation
  of federal, state, or local product-based excise
  or similar gross receipt taxes (e.g., NJ special
  fur clothing tax). However, it does support the
  calculation of some taxes labeled as "excise" or
  "gross receipt" taxes, but that are commonly
  acknowledged as sales and use taxes (e.g., NM and
  HI).
• The tax calculation results generated by the tax
  engine are not only dependent on the tax rules
  submitted by the seller and the logic built into
  the third-party rate engine software, but also
  dependent on the accompanying methodology used by
  Amazon to calculate such taxes. For instance, the
  third-party software does not decide how
  order-level promotions are allocated to the
  individual items in an order Amazon's
  methodology does.

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Survey of Checkout Options and Features
Amazon Merchant Programs Amazon Payments Checkout by Amazon eBay ProStores Google Checkout GoDaddy Quick Shopping Cart IBM Websphere Yahoo Stores X-Cart
Does platform have shopping cart? Yes Yes Yes Yes Yes Yes Yes Yes
Does platform allow for tax collection? Yes Yes Yes Yes Yes Yes Yes Yes
Does platform allow for customization of tax rates? Yes Yes Yes Yes No Yes Yes Yes
Does platform allow for taxation of shipping and handling? Yes Yes Yes Yes No Yes Yes Yes
Does platform allow for different products to be taxed differently? Yes Yes Yes Yes No Yes No Yes
Does platform allow for customer-based tax exemptions? No1 No No Yes No awaiting email response No Yes
Does platform support use of promotional discounts? Yes Yes Yes Yes Yes awaiting email response Yes Yes
How are taxes calculated for promotional discounts? Net Net Net Net Net awaiting email response Net Net
Does platform accommodate for tax issues related to returns? Depends2 No No No No awaiting email response No No
Footnotes
1 - Customers must request tax refund post-purchase. Tax audit records are not adjusted for refunds. 1 - Customers must request tax refund post-purchase. Tax audit records are not adjusted for refunds. 1 - Customers must request tax refund post-purchase. Tax audit records are not adjusted for refunds. 1 - Customers must request tax refund post-purchase. Tax audit records are not adjusted for refunds. 1 - Customers must request tax refund post-purchase. Tax audit records are not adjusted for refunds. 1 - Customers must request tax refund post-purchase. Tax audit records are not adjusted for refunds. 1 - Customers must request tax refund post-purchase. Tax audit records are not adjusted for refunds. 1 - Customers must request tax refund post-purchase. Tax audit records are not adjusted for refunds.
2 - Taxes related to returns of shipments fulfilled by the seller must be calculated by the seller tax records are not adjusted. Taxes related to returns of shipments fulfilled by Amazon are calculated by the platform tax records are adjusted. 2 - Taxes related to returns of shipments fulfilled by the seller must be calculated by the seller tax records are not adjusted. Taxes related to returns of shipments fulfilled by Amazon are calculated by the platform tax records are adjusted. 2 - Taxes related to returns of shipments fulfilled by the seller must be calculated by the seller tax records are not adjusted. Taxes related to returns of shipments fulfilled by Amazon are calculated by the platform tax records are adjusted. 2 - Taxes related to returns of shipments fulfilled by the seller must be calculated by the seller tax records are not adjusted. Taxes related to returns of shipments fulfilled by Amazon are calculated by the platform tax records are adjusted. 2 - Taxes related to returns of shipments fulfilled by the seller must be calculated by the seller tax records are not adjusted. Taxes related to returns of shipments fulfilled by Amazon are calculated by the platform tax records are adjusted. 2 - Taxes related to returns of shipments fulfilled by the seller must be calculated by the seller tax records are not adjusted. Taxes related to returns of shipments fulfilled by Amazon are calculated by the platform tax records are adjusted. 2 - Taxes related to returns of shipments fulfilled by the seller must be calculated by the seller tax records are not adjusted. Taxes related to returns of shipments fulfilled by Amazon are calculated by the platform tax records are adjusted. 2 - Taxes related to returns of shipments fulfilled by the seller must be calculated by the seller tax records are not adjusted. Taxes related to returns of shipments fulfilled by Amazon are calculated by the platform tax records are adjusted.
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Outline

• Amazon.com an e-commerce technology provider and
  a retailer
• The online retail market
• Amazon Services
• Biggest challenges to sales tax collection
• Conclusion suggestions

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Based on Our Experience Offering Tax Services

• The cost and complexity is in the exceptions
• Tax Exempt Sales and Sales Tax Holidays
• Customer Returns Adjustments and Restocking
  Fees
• Shipping and Handling Fees
• Product Taxability Coding
• (See appendix for more detail)

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The Joint Cost of Collection Study
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Outline

• Amazon.com an e-commerce technology provider and
  a retailer
• The online retail market
• Amazon Services
• Biggest challenges to sales tax collection
• Conclusion suggestions

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Conclusion

• There is growth in the long tail of small
  sellers.
• Technological and market forces will compete to
  help small sellers if sales tax collection is
  required.
• The Governing Board should encourage that process
  with additional simplifications to streamline
  collection.

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Amazons Suggestions

• Further streamline transactions involving
  exceptions which represent nearly 60 percent of
  collection cost for small sellers.
• - Consider a blended rate for small sellers
• Provide additional vendor comp for small sellers
• The Gov. Board should take actions to encourage
  the private market to develop technologies and
  tools to help small sellers. Setting a small
  seller exemption too high will only largely
  eliminate any incentive for developers of these
  services.
• Actions the Gov. Board should take
• - Centralize and standardize the states rates
  and taxability databases.
• - Follow the model of member states and
  establish an IT office to liaison with
  developers and small sellers and encourage the
  development of tools for small sellers.
• - Establish standards for private certification
  of automated tax collection software.

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Amazons Estimate of Lost Revenue Relative to
Size of Business Exempted
State and Local Revenue Loss (assuming 5MM sellers)
5,000,000 gt51
1,000,000 gt42
100,000 gt28
10,000 gt15
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2008 Annual Meeting of Stockholders
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Questions?
?
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Appendix
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Sales Tax Holidays
No Holiday (8/7/XX)
Holiday (8/14 - 8/17/XX)
No Holiday (8/18/XX)
1200?
1200?
Not Ordered But Shipped
Ordered But Not Shipped
Order (quote) 8/7/XX Backpack 50.00 Tax
4.00 Total 54.00
Shipment (sale) 8/16/XX Backpack 50.00 Tax
0.00 Total 50.00 WINNER!!!
Order (quote) 8/16/XX Backpack 50.00 Tax
0.00 Total 50.00
Shipment (sale) 8/21/XX Backpack 50.00 Tax
4.00 Total 54.00 LOSER

• Tax Calculation requires date -- date is used by
  the external engine to determine applicable rates
  and rules.
• Remote sellers generally charge tax at shipment
  using shipment date rules.
• Without customization, items may be ordered
  during a tax holiday and quoted no tax, only to
  have the item shipped outside the holiday and
  charged tax.

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Returns and Restocking

• States need to take uniform approach on the
  treatment of returns.
• Retention of shipping handling charges and
  imposition of restocking fees
• California shipping and handling charges
• Time limits
• Connecticut (90 days of purchase)

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Shipping Handling Fees

• States need to take uniform approach to the
  taxation of shipping handling charges.
• Too many variations
• Profit elements (winners versus losers)
• Separately stated
• Allocation methodologies (mixed taxability)
• Type of carrier
• Title passage
• Caps and thresholds
• Clothing (state differences, and general v. tax
  holidays)
• Explainable and understandable to customers
• Mail order catalog order form test