Thursday, December 3, 2009

Why Amazon won't sell wine -- the real story

Everybody in the wine world felt something when Amazon.com announced in October that it was canceling its plan to sell wine. Wine lovers and small wineries gnashed their teeth while retailers, distributors and wine.com popped corks.

At the time, everyone (including the Wall Street Journal) thought it was because of the maze of state regulations.

I learned this week of an issue completely unrelated to wine that had far greater repercussions for the world's largest internet retailer: sales tax. Not just on wine, but on everything.

Currently Amazon collects sales tax for only five states: Kansas, Kentucky, New York, North Dakota and Washington. It gets away with not collecting sales tax in the huge California market because it has no brick-and-mortar shop here.

However, in order to ship wine from California -- which was the plan -- Amazon would have had to open a retail outlet to comply with state law. Wine.com has one in Berkeley for exactly this reason. (Wine.com also has a shop in New York that's so obviously for legal requirements that it will not take cash.)

The problem is, once that California store was open, even if it was only 100 square feet with two items for sale, Amazon the company would have become a California retail shop for the purposes of state tax law, and would have had to start collecting sales tax on everything sold in the Golden State.

One of the main reasons Amazon is so attractive to consumers is its low prices. Adding 8.25% to the price of everything in California would eliminate much of that. The company calculated that the profit it made from selling wine nationwide wouldn't offset the potential loss of business from California alone.

Moreover, the sales tax issue would quickly have compounded. Once cash-strapped state legislatures in Florida and Texas and everywhere else realized California was collecting sales tax from Amazon, they would have reached for their share of the pie.

It's easy to say Amazon could have sold only wines from Washington and New York -- where they're already collecting sales tax -- and Oregon, which has no sales tax. There are some great wines from those states, but how big is the market for them? Amazon doesn't like to lose, but in this case, it would never have been the go-to wine website, not when consumers could go to wine.com and buy brands they already know.

Amazon's wine initiative is dead for now. But keep an eye on the California budget crisis, which is becoming like the never-ending TV show "24." (There's a bomb! A virus! A mole! How can we survive the hour!) There has been a lot of opposition to imposing sales tax on websites because the Internet industry is so important here. If that position ever changes, and Amazon has to start collecting sales taxes anyway, wine lovers might get an unexpected benefit.

11 comments:

Jack Everitt said...

Strange how this didn't come out before.

Oh, "...wine lovers might get an unexpected benefit."

Wine "lovers"? Benefit? Maybe wine "drinkers", but seems iffy at best that wine lovers would benefit, as I suspect few wines that wine lovers couldn't get locally would be available from Amazon. Plus, if Amazon was very successful, there would be fewer wine lover type stores.

W. Blake Gray said...

Regarding Amazon's potential selection, I was a lot more hopeful. There are so many small wineries these days that can't get distribution, and would be willing to let Amazon sell some wine for them. Amazon could have used the empty-warehouse theory, leaving the wines at the winery and only putting in an order to ship when a customer bought them.

All theoretical at this point, though.

Pinotblogger said...

Fantastic post. Makes perfect sense, and congrats on being the first to break the story.

Really important stuff.

Steve Bachmann said...

Well, I think your are part right and part wrong. There is no CA physical retail sales outlet requirement to ship wine or have a license in CA. However, I think your sales tax point is correct anyway. The fulfillment of orders from CA arguably constitutes "doing business" within the state which probably was sufficient to create a sales tax nexus for Amazon in CA. The business I run, Vinfolio, even needs to collect local use taxes in cities and counties in which we pick up and deliver wine with our vans even though we have no physical presence in most of those cities and counties.

W. Blake Gray said...

Thanks for the kind words, guys.

Steve, I don't want to debate an area on which I'm not an expert. The person I spoke to was an expert, and I may have missed a subtlety in the brick-and-mortar requirement (wineries can ship without a retail store, I know that). But I do know that wine.com has a physical store here, and not to make money from.

Jack: I didn't realize this when writing the post, but after chatting with some people today, I believe I understand why this didn't come out before. Amazon had no interest in reminding everyone across the country that it's not collecting sales tax in 45 states.

Which, by the way, I'm perfectly happy with. I buy from Amazon, and I wish I could have bought wine from Amazon. Guess I'll have to settle for Walking Dead Book 5.

Jon Bjork said...

I buy your story. When establishing out-of-state wine shipping permits in several states, to ship direct to consumer you have to set up a sales tax or excise tax nexus in that state.

So it makes sense that Amazon wouldn't want to be forced onto the tax radar screen just because of alcohol agency regulations.

Cara said...

On a mostly unrelated note, I love the Walking Dead series. Glad to find another fan of Robert Kirkman!

Also, this was a really interesting post, because I didn't know anything about sales tax collection issue, even though I receive shipments in New York from Amazon, so you'd think I really would (it's still the only way to get certain hard-to-find books, and shipping was the only way I was going to buy the Oxford Companion to Wine tome).

Steve Bachmann said...

I confirmed my statement with our alcohol attorney before I posted it. No sales outlet is required. I suspect Wine.com's retail outlet is purely a voluntary decision to have an outlet.

W. Blake Gray said...

Steve: Well, thanks for the info. I hope the consultation didn't cost you too much :)

Cara: I still can't believe what Kirkman did at the end of Book 4. In most series of any kind, that would be the end. It's been a year and I still have almost two months to wait to see what happens next (DON'T tell me). The horror, the horror.

Dale Cruse said...

Blake, it sounds as though your reasoning is strong but in the article you never revealed who you got this information from. Was it a specific person with a name or "unnamed persons" or "sources close to the situation" or what?

Ron said...

Wow, that's so obvious in retrospect. Thanks for pointing that out.

Although I don't live in California, even with the benefit you posed at the end I'm still not rooting for their crisis to get worse.