Be First or Be Different
The Importance of a Strategic Advantage and How Jeff Bezos Built the World’s Premier Sales Platform Exploiting Tax Advantages.
A strategic advantage is the most valuable thing to have in the business world, especially when starting a new business. Jeff Bezos used a strategic advantage, recisely a tax advantage, to get Amazon off the ground. He then pummeled his competition with it and literally beat them down and out of the marketplace.
What Was Bezos’ Strategic Advantage?
When Bezos first started Amazon, the state of California (at the time I believe California was the twelfth largest economy in the world) had a little-known tax law. This law said that if you had a physical store in their state you were equired to pay sales tax. If you only had an internet presence you were not required to pay sales tax. This made sense to the bureaucrats (as higher taxes always do). hen the internet was new, many people believed it was a fad that would is appear. Bezos realized that by not putting a physical store in California, then selling his books into California without paying sales tax, this tax law would be a massive strategic advantage.
Massive Strategic Advantage?
Now it doesn’t seem like it’s that big of a deal. But the sales tax rate in California ranges from 7.25% to 10.25% depending on the local municipality. This high rate allowed Amazon to compete head to head with Barnes & Noble and Borders. Many people don’t understand how much retailers pay in overhead. Even though gross profit is 40% to 60%, many retail establishments have a net revenue of less than 4%. This means that $1,000,000 in gross revenue produces
$40,000 in net revenue. If you have a bad year or make a mistake and only net 2%, your profit is $20,000.
As you can see, by avoiding a sales tax, Bezos was adding 7.25% to 10.25% to his net profit, increasing his revenue by over 200%. That’s what I call a strategic advantage!
How Bezos Used Tax Advantage to Clobber Barnes & Noble and Borders
Bezos used California’s sales tax law to undercut his competitors’ prices which allowed Amazon to literally eat its competitors’ market share. Customers naturally migrated over because the price of Amazon books was consistently cheaper. A tax advantage greater than his competitors large enough strategic advantage that Amazon put Borders out of business. Amazon also took a big chunk of market share from Barnes & Noble. It is now just as valuable to be an Amazon best seller as a Publishers Weekly or a New York Times best seller.
Strategic Advantages Must and Do Change
As time passes and even as a company grows and changes, it is necessary to create more and different strategic advantages. In Amazon’s case, Bezos decided that Amazon needed to give Free 2-day shipping to Amazon Prime members. He received a lot of push-back, but in the end, Amazon figured out how it could make such an offer, and the company is thriving. (I personally signed up for Prime shortly after it came out, even before they added TV and movie content, because I saw the value it brought: I didn’t have to go to the store for diapers anymore.)
Amazon Prime’s package now includes Free release-date delivery, Free 2-hour delivery, Alexa deals, restaurant delivery, whole foods benefits, unlimited video streaming and much more.
A New Way to Look at Income Tax
Amazon is now using the federal income tax code (much to the ire of the U.S. government) to create another strategic advantage. Amazon actually seeks to lose the profit generated from its web hosting and server farms, so that it doesn’t have to pay income tax. Amazon is not the only company trying to lose profit to avoid paying taxes. Many companies strategically lose money in certain areas to offset the tax they would have to pay on their profits. For example, if a company’s gross sales are $178 billion and their net profit was 4%, it would equal $7.12 billion. The 2018 income tax burden on this income is $1,495,200,000. Instead of giving those dollars up to the government, Amazon and other large companies - including, but not limited to, Epsco Holdings, PG&E Corp, Wisconsin Energy, NiSource, International Paper, FirstEnergy, Priceline.com, Atmos Energy, General Electric, American Electric Power, Ryder System, Duke Energy, NextEra Energy, Xcel Energy, Ameren, CMS Energy, Sempra Energy, Eversource Energy - strategically lose money so that their income tax burden goes to zero.
Fighting These Companies Is Becoming A Nonpartisan Issue
President Trump stated that Amazon is a no-tax monopoly. Both Democrats and Republicans alike agree with that statement and are not okay with this use of the tax code. Although Amazon does pay state and local income taxes, it pays zero federal income tax. You as an average citizen pay more tax than any of the giant companies listed above.
Now these companies are not doing anything illegal. They are using tax loopholes; our current tax system allows this behavior, and these companies are taking advantage of our tax structure. Jeff Bezos recently stated that these advantages also can be the downfall of a company who over-relies on them. He said that Amazon will fail eventually, but we need to delay its failure if possible. Do you have a strategic advantage?
- Joshua Dudgeon
