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Amazon’s Uneven Playing Field

Amazon is looking for a big subsidy to build its new headquarters—the latest move in the company’s long history of using the government to get favors its rivals can’t.

Olivia LaVecchia

Image: Getty/Bloomberg

Olivia LaVecchia is a researcher with the Institute for Local Self-Reliance, a nonprofit that advocates for equitable development and local government rule in communities around the US. She is the co-author of "Amazon's Stranglehold," a 79-page report detailing how the giant has created a parallel infrastructure that has harmed local communities.

In the hierarchy of the corporate world today, Amazon is near the top. It's one of the top five most valuable companies traded on the major exchanges, and founder and CEO Jeff Bezos is now the second-richest person in the world.

People tend to think that Amazon has gotten there simply by out-competing everyone else. But there's another part of the story of Amazon's rise. From the very beginning, a core part of Amazon's strategy has been taking advantage of public benefits not available to its competitors.

Now, bidding is set to close Thursday on the latest play in this strategy: Amazon's decision to launch a public auction for the location of its second North American headquarters. In that auction, Amazon is angling for such a substantial public handout that, as Amazon itself puts it in its Request for Proposals, the "magnitude may require special incentive legislation." Since Amazon opened bidding, more than 100 cities across the U.S. and Canada have publicly announced their interest in the Amazon sweepstakes, and have given over conference rooms and staff time to work on the bid, launched PR stunts, and started hashtags. Experts say that the end result of all of this hype could be a multi-billion dollar giveaway from taxpayers to Amazon.

The process has unfolded like the work of a seasoned pro, and that's because it is. It started back in 1995, when Bezos was founding the company, and famously decided to base it in Seattle instead of the Bay Area. His reasoning, he told Fast Company a year later, was so that Amazon could avoid collecting sales tax in more-populous California, gaming a sales tax loophole that predated the rise of online shopping.

Sales tax avoidance remained critical to Amazon's strategy—and its appeal to consumers—for years. As the company grew, it used increasingly elaborate tricks to hold onto its sales tax status, including outfitting employees with fake business cards when they travelled to certain states, strong-arming states into special deals that allowed it to remain sales tax-free, and, in Texas, using a warehouse-concealment scheme that later led the state to sue Amazon for $269 million in back sales taxes.

All of this evasion gave Amazon a 6-to-10 percent, government-granted price advantage over its brick-and-mortar competitors in the form of being able to offer tax-free sales to its customers. Even as recently as 2011, when Amazon was already well-established, a study of 275,000 households by economists at Ohio State University found that that price difference was central to the company's appeal. When Amazon started collecting sales tax in a state, the economists found, household spending on its site dropped by 9.4 percent overall, and 29.1 percent for big-ticket items.

While Amazon often frames its tactics as competition, really, many of them are a kind of graft, with smaller businesses and entrepreneurs left facing a company that gets to play by a completely different set of rules

Around 2005, Amazon also started using a new strategy to cut its costs. As it added more warehouses to its delivery network, it started to focus on extracting large subsidies for the facilities. The strategy has paid off for Amazon: The company has netted at least $1.1 billion in public incentives to fund its expansion, according to data compiled by the Institute for Local Self-Reliance and Good Jobs First. Between 2005 and 2014, Amazon received a subsidy on at least half of all of its new facilities.

Today, Amazon's well-oiled subsidy-extraction machine includes in-house site location experts who travel the country negotiating with local and state officials for incentive deals, and region-by-region policy teams that coordinate its local and state lobbying efforts.

"I effectively identify, negotiate, and implement economic development incentives," reads the LinkedIn page of one manager in Amazon's economic development department. Amazon is continuing to staff up these efforts. Its current job postings include those for lawyers and accountants who, as the job descriptions describe, will "support the site selection process including … execution of economic development, infrastructure, and tax related applications and agreements."

The company's successes include those like a pair of deals in Joliet, Ill., where, despite a worsening state budget crisis, Amazon won a $10 million tax break for a new fulfillment center in 2015, and just the next year, an additional $20 million for a second facility next door. Amazon did not respond to a request to comment on this story.

What's perhaps most remarkable about Amazon's long history of public handouts is that the public has stood for it

It's not just the state and local levels. At the federal level, Amazon relies heavily on tax loopholes, too. In one arrangement, Amazon decided to locate its European headquarters in the tax haven of Luxembourg, and then transfer profits from assets like software and trademarks into the tiny country, effectively slashing its income taxes in both the U.S. and the European Union. Earlier this month, the EU ordered Amazon to pay $295 million in back taxes over the scheme, in part because of the anticompetitive nature of a tax arrangement that's available to one company but not to others. "Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules," Margrethe Vestager, the EU Commissioner for Competition, told the Associated Press.

The EU decision underlines the fact that while Amazon often frames its tactics as competition, really, many of them are a kind of graft, with smaller businesses and entrepreneurs left facing a company that gets to play by a completely different set of rules. Some of Amazon's competitors do try to engage in the same tactics, including fellow tech giants Apple, Google, and Facebook, notably for their data centers. Amazon, however, has been among the most aggressive, and many of Amazon's other competitors don't have access to the same rulebook. Amazon's competitors are largely small independent businesses, while many other upstart tech giants were disrupting the businesses of other huge corporations. Even when economic incentive programs are ostensibly open to both small and large businesses, research by Good Jobs First found that large firms snapped up 90 percent of the incentives. Other research, meanwhile, finds that independent firms remain leading job creators.

What's perhaps most remarkable about Amazon's long history of public handouts is that the public has stood for it. Especially at the local level, on top of its tax grabs and loopholes, Amazon's rise is leading to vacant stores and drops in property tax values that are threatening town and city revenue streams. And at the same time as Amazon's unfair playbook has increasingly impacted other businesses' ability to compete, the U.S. has also seen a stark drop in new business formation.

Amazon is increasingly getting public policy to work for its own benefit. It's time for public officials to instead invest in broad-based economic development that benefits many types of employers—starting with passing on Amazon's second headquarters arm's race. Otherwise, before long, it will be Amazon's game that the public is playing.