The Everything Store: Jeff Bezos and the Age of Amazon

by Brad Stone

  CHAPTER 10

  Expedient Convictions

  The spectacular rise of Amazon’s visibility and market power in the wake of the great recession brought the company more frequently into the public eye, but the attention was not always flattering. During the years 2010 and 2011, the company battled a growing chorus of critics over its avoidance of collecting state sales tax, the mechanics behind two of its large acquisitions, its move into the business of publishing books (in competition with its own suppliers), and what appeared to be its systematic disregard for the pricing policies of major manufacturers. Almost overnight, the company that viewed itself as the perennial underdog now seemed to many like a remote and often arrogant giant who was trying to play by his own set of rules.

  Bezos (and the few Jeff Bots that Amazon allowed to speak in public) perfected an attitude of bemused perplexity when addressing criticisms. Bezos often said that Amazon had a “willingness to be misunderstood,” which was an impressive piece of rhetorical jujitsu—the implication being that its opponents just didn’t understand the company.1 Bezos also deflected attacks by claiming that Amazon was a missionary company, not a mercenary one. That dichotomy originated with now former board member John Doerr, who formulated it after reading his partner Randy Komisar’s 2001 business-philosophy book The Monk and the Riddle. Missionaries have righteous goals and are trying to make the world a better place. Mercenaries are out for money and power and will run over anyone who gets in the way. To Bezos, at least, there was no doubt where Amazon fell. “I would take a missionary over a mercenary any day,” he liked to say. “One of those great paradoxes is that it’s usually the missionaries who end up making more money anyway.”2

  Amazon spokespeople approached these controversies with simple, direct points that they repeated over and over, rarely veering into the uncomfortable details of the company’s aggressive tactics. The arguments had the advantage of being completely rational while also serving Amazon’s strategic interests. And it was these expedient convictions that, to varying degrees, helped steer Amazon through the period of its greatest public scrutiny yet.

  While the recession was in many ways a gift to Amazon, the deteriorating finances of local governments in the United States and Europe prompted a new fight over the collection of sales tax—the legal avoidance of which was one of the company’s biggest tactical advantages. It was a high-stakes battle where there were more than two sides, no one played it entirely straight, and Amazon’s deeply held convictions just happened to be conveniently expedient for its own long-term interests.

  Beginning in late 2007, when governor of New York Eliot Spitzer introduced a proposal to raise millions of dollars by expanding the definition of what constituted a taxable presence in his state, Amazon was faced with the disconcerting possibility that its long exemption from adding 5 to 10 percent in sales tax onto the prices of most of its products—which had shaped its earliest decisions about where to conduct operations and place its headquarters—was about to end.

  Spitzer’s proposal flopped, at first. He withdrew it the day after introducing it, amid his own slumping approval ratings and a backlash over what his budget director said was concern that residents might consider the bill a tax increase.3 But New York State had a $4.3 billion budget gap that desperately needed to be filled. The following February, a month before Spitzer’s political career imploded in a prostitution scandal, Spitzer reintroduced the bill. David Paterson, his successor, embraced the proposal, and in April it was passed by the state legislature in Albany.

  The law cleverly eluded a 1992 Supreme Court ruling, Quill v. North Carolina, stipulating that only those merchants who had a physical presence or nexus, like a storefront or an office, in a state had to collect sales tax there. (Technically, the tax was still due for online purchases, but customers were supposed to pay it themselves.) The New York law specified that an affiliate website that took a commission for passing customers on to an online retailer was an agent of that retailer, and thus the retailer officially had a presence in that affiliate’s state. By this ruling, if a Yankees-fan website in New York made money every time a visitor clicked a link on its pages and bought former manager Joe Torre’s memoir on Amazon.com, then Seattle-based Amazon had an official storefront in New York and so had to collect sales tax on all purchases made in that state.

  Amazon was not amused. The New York law went into effect over the summer of 2008 and, along with Overstock.com, another retailer, it sued in state court—and lost. Publicly, the company complained that state-by-state tax collection was complex and impractical. “There are currently about seventy-six hundred different jurisdictions in the country that tax, including things like snow-removal and mosquito-abatement districts,” says Paul Misener, Amazon’s vice president of global public policy and the public face of its tax battles.

  Amazon had avoided sales-tax collection for years with various clever tricks. In states where it had fulfillment centers or other offices, like Lab126, it skirted the definition of what constituted a physical presence by classifying those facilities as wholly owned subsidiaries that earned no revenue. For example, the fulfillment center in Fernley, Nevada, operated as an independent entity called Amazon.com.nvdc, Inc. These arrangements were unlikely to hold up under direct scrutiny, but Amazon had carefully negotiated with each state when opening its facilities, securing hands-off treatment in exchange for the company’s generating new jobs and economic activity. Bezos considered his exemption from collecting sales tax to be an enormous strategic advantage and brought a libertarian’s earnestness to what he believed was a battle over principle. “We’re not actually benefiting from any services that those states provide locally, so it’s not fair that we should be obligated to be their tax collection agent since we’re not getting any of the services,” he said at a shareholder meeting in 2008.

  Bezos also thought his exemption from collecting sales tax was a big benefit for customers, and the prospect of losing it triggered his apoplectic reaction to raising prices. He had good reason to be worried about the effects of sales-tax collection. When New York passed its Internet sales-tax law, Amazon’s sales in New York State dropped 10 percent over the next quarter, according to a person familiar with Amazon’s finances at the time.

  New York’s law spread like a bad cold. Similarly cash-strapped states like Illinois, North Carolina, Hawaii, Rhode Island, and Texas tried the same bank-shot approach of declaring that affiliate websites constituted nexuses. In response, Amazon borrowed a hardnosed tactic that Overstock had used in New York and severed ties with its affiliates in each state. These sites were often run by bloggers and other entrepreneurs who needed their affiliate commissions, and they were angered to find themselves wedged between a cash-starved state government on one side and an online giant belligerently clinging to a blatant tax loophole on the other.

  The affiliates were not the only victims at this stage of the sales-tax fight. Vadim Tsypin was an Amazon engineer who often worked from his home in Quebec, Canada. In late 2007, around the time Eliot Spitzer was proposing his tax bill and Amazon’s lawyers were growing more anxious, Tsypin’s manager showed him the company’s restrictive Canada policy, which declared that Amazon had no employees working in that country. His manager allegedly told Tsypin they had to cover up his history of working from home and, according to court documents, said that “Amazon can have multimillion-dollar problems. If we have even one employee on the ground there, it is a big violation of U.S. and Canadian law.”

  Tsypin refused to alter his old time sheets and evaluations, believing that it wouldn’t stand up to scrutiny. He claimed that his Amazon bosses then started to harass him into quitting, which led to his getting sick (“constant migraine headaches and frequent seizure-like blackouts”) and taking a medical leave of absence. In 2010, he sued Amazon in King County Superior Court for wrongful termination, breach of contract, emotional distress, and negligent hiring—and he lost. The judge acknowledged Tsypin’s condition was work r
elated but said the claims were not strong enough to impose a civil liability.

  Large companies like Amazon are frequent targets of wrongful-termination claims. But Vadim Tsypin’s case was unusual because it grew out of Amazon’s own growing sales-tax anxieties and because the discovery phase brought Amazon’s extensive tax-avoidance playbook into the public record. Dozens of pages of internal company rulebooks, flowcharts, and maps were filed with the King County Superior Court on Third Avenue in downtown Seattle. Together, they revealed a fascinating portrait of a company desperately contorting itself to accommodate a rapidly shifting tax climate.

  The guidelines approached the surreal. Amazon employees had to seek approval to attend trade shows and were told to avoid activities that involved promoting the sale of any products on the Amazon website while on the road. They couldn’t blog or talk to the press without permission, had to avoid renting any property on trips, and couldn’t place orders on Amazon from the company’s computers. They could sign contracts with other companies, such as suppliers who were offering their goods for sale on the site, only in Seattle.

  Then the seemingly arbitrary partitions in the company’s corporate structure became even more important. Traveling employees working for Amazon’s North American retail organization were told to say they worked for a company called Amazon Services, not Amazon.com, and to carry business cards to that effect. According to one document, they were instructed to say, “I’m with Amazon Services, the operator of the www.amazon.com website and provider of e-commerce solutions and services, and I’m here to gather information about the latest industry developments and trends,” if they were ever queried by the media regarding their attendance at a trade show.

  Color-coded maps were widely distributed to employees at headquarters in Seattle. Travel to green states like Michigan was okay, but orange states like California required special clearance so that the legal department could track the cumulative number of days Amazon employees spent there. Travel to red states, like Texas, New Jersey, and Massachusetts, required employees to complete an intensive seventeen-item questionnaire about the trip that was designed to determine whether they would make the company vulnerable to sales-tax collection efforts (number 16: “Will you be holding a raffle?”). Amazon lawyers then either nixed the trip altogether or obtained a private letter ruling from that state spelling out its specific treatment of that particular situation.

  There was little internal discussion by management on whether it was right or wrong or if it was affecting morale among employees, according to senior employees at the time. It was just strategy, a way to preserve a significant tax advantage that enabled the company to offer comparatively low prices. “The economic outlook for many states is bleak,” read one early 2010 internal tax memo to employees that was filed in the Vadim Tsypin case record. “As a result, states are pursuing taxpayers more aggressively than before. Amazon’s recent public experiences with New York and Texas provide timely and pertinent examples of the heightened risk. That’s why our attention to nexus-related issues are more important than ever.”4

  That same year, 2010, fully alerted to the urgency of combating the Amazon threat, Walmart, Target, Best Buy, Home Depot, and Sears put aside their traditional enmities to join forces in an unusual coalition.5 They jointly backed a new organization called the Alliance for Main Street Fairness, which shrouded itself in populist language and—somehow managing to conceal the dripping irony—touted the importance of preserving the vitality of small mom-and-pop retailers. The organization employed a team of well-financed lobbyists who set up a sophisticated website and ran print and television ads around the country. The CEOs of all these big retailers monitored the campaign closely. Mike Duke, Walmart’s CEO, requested frequent briefings on the sales-tax fight, according to two lobbyists involved in the battle.

  Amazon fought the sales-tax expansion aggressively, soliciting cooperation from politicians by deploying both carrot and stick in the area where they might feel it most—jobs. In Texas in 2011, the legislature passed a bill that would force online retailers with distribution facilities in the state to collect sales tax, and Amazon threatened to close its fulfillment center outside Dallas, fire hundreds of local workers, and scrap plans to build other facilities in the state. Texas governor Rick Perry promptly vetoed the bill. In South Carolina, Amazon won an exemption on a new law by using the same threats, and it agreed to send customers e-mails helpfully reminding them they were supposed to pay sales tax on their own. In Tennessee, legislators agreed to delay a bill when Amazon offered to build three new fulfillment centers in the state.

  During these skirmishes, Bezos advocated for a federal bill that simplified the sales tax code and imposed it over the entire e-commerce industry. (This had the advantage of being a highly unlikely scenario, considering the political deadlock gripping Washington, DC, at the time.) “If I say to customers, ‘We’re not required to collect sales tax, the Constitution is crystal clear that states cannot force out-of-state retailers to collect sales tax and cannot interfere in interstate commerce, but we’re going to do it voluntarily anyway,’ that isn’t tenable,” Bezos told me in a 2011 interview. “Customers would rightly protest. The way this has to work is you either have to amend the Constitution or you have to pass federal legislation.”

  The fight came to a dramatic head in 2012. Amazon surrendered in Texas, South Carolina, Pennsylvania, and Tennessee, negotiating accommodations that allowed it to stay tax-free for a few more years in exchange for putting new fulfillment centers in each state. In California, the most populous state, where the company apparently thought it could stave off the inevitable, Amazon girded itself for a fight. After the state legislature passed its sales-tax bill, Amazon engineered a campaign to overturn the law with a ballot measure and spent $5.25 million gathering signatures and running radio advertisements. Observers projected the company would have to spend over $50 million to see the fight through to the end.6

  It quickly became evident that such a battle would be expensive, bitterly contested—and vicious. The Alliance for Main Street Fairness carpet-bombed the state with anti-Amazon advertisements, and editorial writers and bloggers largely sided with the big-box chains. “Amazon’s attempt to avoid sales tax is one more sad example of the short-term thinking that rules American business,” blogged Web evangelist Tim O’Reilly, knowing just how to push the buttons of Bezos, who prided himself on long-term thinking.7 Inside Amazon, it was increasingly clear that the company was being fitted for the black hat of the bad guy. At the same time, Amazon was preparing to confront Apple in the high-stakes tablet market with the Kindle Fire. Colleagues insisted to Bezos that Amazon could not afford to see its brand tarnished at such a critical juncture.

  So that fall, Amazon reversed course and reached an agreement with California: the company would drop its ballot measure in exchange for one more tax-free Christmas season, and it promised to build new fulfillment centers outside San Francisco and Los Angeles.8 Soon after, Paul Misener testified before the Senate Commerce Science and Transportation Committee and reiterated Amazon’s support for a federal bill—as did Amazon’s unlikely new bedfellows in the sales-tax battle, Best Buy, Target, and Walmart. Now eBay, another combatant in the sales-tax wars, stood alone in trying to protect its smallest merchants, like the stay-at-home mother bringing in extra money by selling handmade mosaics. It advocated that the law should not apply to businesses with fewer than fifty employees or less than $10 million in annual sales, though most of the proposed national sales-tax bills put the exemption at less than $1 million. As of this writing, a national sales-tax-collection bill has not yet passed both houses of Congress.

  Amazon was losing a sizable advantage, but Bezos, ever the farsighted chess player, was compensating by cultivating new ones. Amazon’s new fulfillment centers would be close to large cities, allowing for the possibility of next-day or same-day delivery and the wider rollout of its grocery business, Amazon Fresh. Amazon also expanded its test of Am
azon Lockers—large, orange locked cabinets placed in supermarkets, drugstores, and chains like Radio Shack that customers could have their Amazon packages shipped to if they liked.

  As the era of tax-free online purchases was ending in many states, the true architect of Amazon’s tax strategy and chief of its eighty-person tax department, an attorney named Robert Comfort, stepped out of the shadows. Comfort, a Princeton alumnus who joined Amazon in 2000, had spent more than a decade employing every trick in the book, and inventing many new ones, to minimize the company’s tax burden. He created its controversial tax structure in Europe, funneling sales through entities in Luxembourg, which has a famously low tax rate. In 2012, this arcane tax structure nearly collapsed amid a wave of populist European anger directed at Amazon and other U.S. companies, including Google, who were trying to minimize their overseas tax burden.

  Comfort announced his retirement and left Amazon in early 2012, just as the taxman was catching up with the company. (He has since taken a new job—a titular position as Seattle’s honorary consul for the Grand Duchy of Luxembourg.)

  And for the first time in its history, Amazon would have to fight its offline rivals on a level playing field.