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Amazon to alter the way it does business in California

The world's largest online retailer plans to spend $500 million to open large distribution centers and other facilities now that Gov. Jerry Brown has signed a sales tax law.

September 23, 2011|By Marc Lifsher and Andrea Chang, Los Angeles Times
  • A worker pushes a box of diapers along a conveyor belt at Amazon's Phoenix Fulfillment Center in Goodyear, Ariz. The online retailer plans to spend $500 million to open large distribution centers and other facilities in California now that Gov. Jerry Brown has signed a new sales tax law.
A worker pushes a box of diapers along a conveyor belt at Amazon's Phoenix… (Joshua Lott, Bloomberg )

Reporting from Sacramento and Los Angeles — Inc. will change the way it does business, at least in California, now that Gov. Jerry Brown has signed into law a bill that requires the giant Internet retailer and certain out-of-state online merchants to collect sales taxes on purchases by Californians.

Starting next Sept. 15, Amazon and many other Internet retailers will lose their ability to offer essentially a savings to customers by skipping the levy of 7.25% or more, which bricks-and-mortar stores and other merchants must collect.

Brown signed the measure Friday at the San Francisco headquarters of Gap Inc., a clothing manufacturer that backed the legislation. The new law supplants a similar one that Amazon had been challenging since it took effect July 1.

Abandoning its fight to avoid collecting sales taxes, Amazon now seeks to build what Paul Misener, a company vice president, called "a lasting partnership with the state."

The Seattle company, he said, plans to spend $500 million to open large distribution centers and other facilities in California that would create 10,000 full-time jobs — ones that carry such benefits as health insurance.

The new law was hammered out in a compromise among lawmakers, the retail industry and online merchants, mainly Amazon and auction house EBay Inc.

The compromise, Brown said, showed that bipartisan efforts to boost jobs and the economy are possible to achieve and that "a prolonged, costly ballot battle is a benefit to no one."

With the tax fight behind it, Amazon must come up with new ways to ensure that its customers keep clicking "add to cart" to buy tens of thousands of items as varied as books, plumbing supplies and furniture.

One idea, marketing experts suggested, might be to use the expanded distribution network to get merchandise to customers in just a few hours instead of days.

"They will be forced to innovate," said Anthony Dukes, a USC marketing professor. Under the Internet sales tax law, he said, Amazon will have to work harder to attract shoppers, "which could be good for all of us."

In California, a state that analysts say accounts for about 15% of Amazon's U.S. sales, the deals offered by the world's largest online retailer won't seem quite as attractive as they have been since Amazon opened 17 years ago. But the company still would be competitive, analysts said.

For many products, Amazon charges 5% to 6% less than the prices of the same goods in stores or on other websites, even when sales tax is added, according to a July 21 study by Chicago investment firm William Blair & Co.

Amazon would not discuss possible changes in its business model other than opening new distribution centers in California. Spokeswoman Mary Osako said the company was "obsessed with our customers."

In fighting the previous law, Amazon avoided any contacts with the state, such as having offices, employees and contract workers in California. It even severed ties with some 10,000 affiliated websites in California in June.

Under a 1992 U.S. Supreme Court decision, companies based elsewhere that have no contact with the state don't have to collect sales taxes from customers in the state.

But as Amazon has grown, it also has been looking at how it does business, analysts said.

"Amazon can offer a fuller array of services like same-day delivery and Amazon Fresh, which is its grocery delivery," said Jordan Rohan, an Internet analyst at investment bank Stifel, Nicolaus & Co. "Amazon could certainly expand services if it had local distribution."

Rohan said the company could become more than a retailer; it could become "the ultimate in fast, logistical excellence."

To do that, Amazon would need to add fleets of trucks and distribution centers in every metropolitan area of California and throughout the country, he said.

Amazon also pledged Friday to restore its relationships with its former California affiliates, which earned commissions for referring customers to Amazon through links on their sites.

Its new strategy "might sacrifice [a higher profit] margin and short-term profits to secure a very strong position in California," said Randy Bucklin, a professor specializing in Internet marketing at the Anderson School of Management at UCLA.

Amazon could compete through efficiency, brand acceptability and customer service, just as Wal-Mart Stores Inc., Best Buy Corp., Target Corp. and other bricks-and-mortar stores do, Bucklin said.

The creation of facilities and new jobs would help Amazon rebuild an image marred by the political war with California competitors, the governor, the Legislature and growing popular sentiment that Amazon shouldn't be treated any differently from bricks-and-mortar retailers that have to collect sales taxes.

Rohan said customers in time would get used to paying sales taxes.

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