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Amazon and Target are both in the retail business. You'd never know it from their tax bills
By Alison Fitzgerald and Catherine Dodge
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Illustration by Carlos Monteiro
Anyone who wants a Nintendo Wii console or the latest John Grisham novel can pick it up at the nearest Target (TGT) store or log on to Amazon.com (AMZN) and have it delivered. The similarities between the two retailers aren't as apparent when it comes to taxes. Amazon's effective rate—the total it pays in federal, state, local, and international income taxes after deductions, along with its sales and property levies—has been more than 10 percentage points lower than Target's for the past four years. Target's effective tax rate in 2010 was 35.1 percent, compared with Amazon's 23.5 percent. Amazon in 2010 owed $352 million in income taxes worldwide on income of $1.5 billion, according to its SEC filings, while Target owed $1.58 billion on income of $4.5 billion. Amazon, the world's largest online retailer, has successfully resisted efforts from politicians to make it collect state and local taxes that brick-and-mortar rivals must charge. Tax laws "absolutely" put Target at a disadvantage, says Brian Sozzi, an analyst with Wall Street Strategies in New York. "It's one of the reasons why Amazon has been so successful."
These companies represent just one example of how the U.S. corporate tax code favors global companies over domestic ones, high-tech businesses over old-line manufacturers, and drugmakers over oil companies. The U.S. federal corporate tax rate of 35 percent is the highest in the developed world. Still, the Treasury Dept. says the federal government bleeds $1.2 trillion a decade as battalions of lobbyists, accountants, and lawyers create and promote more ways to avoid taxes.
This state of affairs has grown out of a political process where companies and their trade associations steer campaign money to lawmakers who write into laws special tax breaks for favored industries. "A tangle" is what George K. Yin, a former chief of staff for Congress's Joint Committee on Taxation and now a law professor at the University of Virginia, calls the tax code. "It is a very complicated society and economy that we live in. You add to that the fact that we don't have all politicians with pure hearts and minds. And then you have all the different interest groups." Put it all together and what do you get? A 5,000-page document that in printed form weighs around nine pounds—as much as a large newborn baby.
The U.S. tax code was written at a time when American companies dominated the world economy and the Internet hadn't entered the imaginations of Defense Dept. scientists. The last major rewrite a quarter century ago didn't alter that basic structure, which taxes companies on worldwide income only when they bring home profits earned overseas. "We have lots and lots of tax preferences that reduce the effective rate," says Ed Kleinbard, a tax law professor at the University of Southern California and a former chief of staff of the Joint Committee on Taxation. Those preferences "distort decisions and are imperfectly distributed throughout the corporate sector."
The effect of the tax code on business behavior is clear when comparing Target and Amazon. Amazon, based in Seattle and founded in 1995, has made a series of moves to cut its tax bill since it became profitable in 2005. That year it established a European headquarters in Luxembourg, where the corporate income tax rate is 21 percent. The following year the company paid an effective tax rate of 49.6 percent as a result of selling assets to its Luxembourg subsidiary, according to its Securities and Exchange Commission filings. Since 2007, Amazon's effective tax rate has ranged from 27.9 percent to 21.9 percent. Executives at Amazon declined to be interviewed.
By moving intangible assets such as patents and intellectual property to low-tax countries, Amazon could then pay its subsidiaries in those countries for the use of the assets, cutting its income in high-tax jurisdictions. The practice, known as transfer pricing, is a common strategy global companies employ to reduce taxes. Those techniques "are not readily available to purely domestic firms," says Sullivan.
Amazon didn't disclose in its corporate filings exactly what assets it moved to other locations. However, the company holds 253 U.S. patents and 39 U.S. registered trademarks, according to the U.S. Patent and Trademark Office's online database. The patents include several for its Kindle electronic reader and for its recommendation system.
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By Alison Fitzgerald and Catherine Dodge
Browse Issues
Browse the BusinessWeek Archive
Illustration by Carlos MonteiroAnyone who wants a Nintendo Wii console or the latest John Grisham novel can pick it up at the nearest Target (TGT) store or log on to Amazon.com (AMZN) and have it delivered. The similarities between the two retailers aren't as apparent when it comes to taxes. Amazon's effective rate—the total it pays in federal, state, local, and international income taxes after deductions, along with its sales and property levies—has been more than 10 percentage points lower than Target's for the past four years. Target's effective tax rate in 2010 was 35.1 percent, compared with Amazon's 23.5 percent. Amazon in 2010 owed $352 million in income taxes worldwide on income of $1.5 billion, according to its SEC filings, while Target owed $1.58 billion on income of $4.5 billion. Amazon, the world's largest online retailer, has successfully resisted efforts from politicians to make it collect state and local taxes that brick-and-mortar rivals must charge. Tax laws "absolutely" put Target at a disadvantage, says Brian Sozzi, an analyst with Wall Street Strategies in New York. "It's one of the reasons why Amazon has been so successful."
These companies represent just one example of how the U.S. corporate tax code favors global companies over domestic ones, high-tech businesses over old-line manufacturers, and drugmakers over oil companies. The U.S. federal corporate tax rate of 35 percent is the highest in the developed world. Still, the Treasury Dept. says the federal government bleeds $1.2 trillion a decade as battalions of lobbyists, accountants, and lawyers create and promote more ways to avoid taxes.
This state of affairs has grown out of a political process where companies and their trade associations steer campaign money to lawmakers who write into laws special tax breaks for favored industries. "A tangle" is what George K. Yin, a former chief of staff for Congress's Joint Committee on Taxation and now a law professor at the University of Virginia, calls the tax code. "It is a very complicated society and economy that we live in. You add to that the fact that we don't have all politicians with pure hearts and minds. And then you have all the different interest groups." Put it all together and what do you get? A 5,000-page document that in printed form weighs around nine pounds—as much as a large newborn baby.
The U.S. tax code was written at a time when American companies dominated the world economy and the Internet hadn't entered the imaginations of Defense Dept. scientists. The last major rewrite a quarter century ago didn't alter that basic structure, which taxes companies on worldwide income only when they bring home profits earned overseas. "We have lots and lots of tax preferences that reduce the effective rate," says Ed Kleinbard, a tax law professor at the University of Southern California and a former chief of staff of the Joint Committee on Taxation. Those preferences "distort decisions and are imperfectly distributed throughout the corporate sector."
The effect of the tax code on business behavior is clear when comparing Target and Amazon. Amazon, based in Seattle and founded in 1995, has made a series of moves to cut its tax bill since it became profitable in 2005. That year it established a European headquarters in Luxembourg, where the corporate income tax rate is 21 percent. The following year the company paid an effective tax rate of 49.6 percent as a result of selling assets to its Luxembourg subsidiary, according to its Securities and Exchange Commission filings. Since 2007, Amazon's effective tax rate has ranged from 27.9 percent to 21.9 percent. Executives at Amazon declined to be interviewed.
By moving intangible assets such as patents and intellectual property to low-tax countries, Amazon could then pay its subsidiaries in those countries for the use of the assets, cutting its income in high-tax jurisdictions. The practice, known as transfer pricing, is a common strategy global companies employ to reduce taxes. Those techniques "are not readily available to purely domestic firms," says Sullivan.
Amazon didn't disclose in its corporate filings exactly what assets it moved to other locations. However, the company holds 253 U.S. patents and 39 U.S. registered trademarks, according to the U.S. Patent and Trademark Office's online database. The patents include several for its Kindle electronic reader and for its recommendation system.
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