How Does Amazon Avoid Paying Taxes?

Amazon is the second biggest company globally, second only to Walmart. While the latter is known for being a global retailer with over 10,000 stores and 1.6 million employees, the former has been called “one of the most influential economic and cultural forces in the world.”

Amazon is the more significant retailer, the world’s biggest, outside of China. Amazon is also the world’s biggest provider of cloud computing and live-streaming services. Its streaming media service, which is part of Amazon Prime, has over 200 million subscribers. And yet despite its successes, Amazon’s tax rate in 2021 was just 6%. So how does Amazon avoid paying taxes at higher rates?

American Workers Pay 28.3% Taxes Per Dollar Earned

In contrast to Amazon’s low corporate tax rate, the average American pays 28.3% in taxes on each dollar earned when you count the money taken out of American workers’ wages to cover the mandated Federal Insurance Contributions Act.

In 2021, Amazon saw a record-breaking pretax income of over $35 billion, a figure inflated partly due to the increased demand created by lockdowns.

During that same year, 20 million households suffered from food scarcity, 10 million were behind in their rent or mortgage payments, and even now, there are three million more unemployed Americans than before the pandemic. Those with jobs were, on average, paying over 22% more per dollar in taxes on their income than was Amazon.

How Amazon Paid $0 Taxes In The Past

Amazon’s tax rate means that it saved roughly $5.2 billion in federal income tax the same year.

If Amazon had foregone any of the available tax breaks and instead paid the statutory 21% tax paid by other “legal entities” in its tax bracket, it would have paid more than $7.3 billion. Instead, its “take-home pay” was over $33 billion.

It’s a lot more than Amazon paid in the first year of the Trump-GOP tax law—Amazon paid less than zero. Discerning minds (and anyone who can do basic math) may be wondering how Amazon managed to pay “less than zero” taxes. Simple—Amazon qualified for a $129 million tax rebate that year, earning a net federal income tax benefit.

Amazon’s $18 Billion Tax Savings

That 6% tax rate is high for Amazon, historically speaking. Over the four years preceding, the company’s federal income tax rate was a just 5.1% on over $78 billion in income.

Had Amazon been taxed at the same rate as the average American, it would have paid over $22 billion in taxes.

In reality, it paid less than $4 billion. You can buy a lot of schools (or fighter jets) with $18 billion in tax revenue, so why does the US federal government tolerate this?

The truth is, they do a lot more than tolerate it. Amazon can pay so little in income tax precisely because of tax breaks created, endorsed, and even expanded by the US Congress in recent years.

Reinvesting Intentions

Before looking at exactly how Amazon manages to avoid paying its fair share in taxes, let’s look at the reasoning behind these massive tax breaks. Those in government who champion the special treatment of multi-billion-dollar transnational corporations label tax breaks “incentives.”

The reasoning is that the huge companies who get these breaks are then inspired to give back to the society that made them so wealthy. These incentives are meant primarily to spur economic growth.

The companies that are given access to tax deductions are expected to reinvest their tax savings in things like hiring and training new people, advanced industry, and boosting trade.

Given that Amazon employs 1.1 million Americans, it seems what’s good for Amazon is good for the American employee – at least at first glance.

Do Tax Credits and Deduction Spur Hiring?

Amazon has topped the list of US companies in research and development spending for years, beating out rivals like Google’s parent company Alphabet by a wide margin.

Many of Amazon’s current products—the Fire TV Stick, and Alexa are the fruits of this R&D spending—on which Amazon gets massive deductions.

Amazon also benefits from investments in property, plant, and equipment. The deductions on its PP&E assets are assumed to ultimately translate into more hiring and more jobs.

But are those jobs worth the price?

Amazon is the second biggest US employer, though many say working for Amazon is no cakewalk. The company is known to actually pay people to quit in order to avoid the costs associated with increased wages and benefits offered to veteran employees.

Legal Tax Avoidance

None of this should come as a surprise. In fact, less than 1% of the Internal Revenue Code, the body of law that codifies and defines all existing US tax regulations, is concerned with generating revenue for the government.

The bulk of the 6,550-page document—in fact, about 6,000 of its pages—contains information about avoiding paying taxes through deductions, credits, and incentives.

Amazon receives tax credits ($1.1 billion in 2021) and deducts another $1.3 billion in excess stock options and foreign-derived intangible income.

All perfectly above board and legal—in fact, some of these programs are specifically those which have been recently expanded by Congress. But where does the rest come from?

Prime Losses

Losses. Specifically, retail losses, and more specifically, retail losses associated with its direct Prime sales.

Amazon’s shipping losses alone were over $7 billion as far back as 2017, and with same-day Prime offers, it’s doubtful that that figure has decreased. Amazon makes so little on its Prime membership program and services, like Amazon Prime Video, that it (on paper) takes a loss.

These losses add up, and by selling some items below cost, Amazon can generate tens of billions of dollars in losses each year, preventing its need to pay taxes and (in effect) driving its tax rate down.

Amazon’s long-term strategy can only be guessed at, but it has long been known to follow a route like Walmart’s in its search for market dominance: eliminate competition, especially on the local level.

Amazon avoids even more taxes on that local level and (again) can use its massive size to essentially strong-arm advantageous tax agreements from state and local politicians, ostensibly under the guise of bringing new jobs to the area.

This may not continue forever, as some in Congress would like to see corporations pay more taxes than the average grocery bagger. The Build Back Better Act, which may be enacted into law this year, proposes a 15% minimum tax on corporations with over $1 billion in profits. Whether it will pass is anyone’s guess.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.