02 May 2011

Amazon I N C E P T I O N

Although this is a local issue, it demonstrates some universal issues in economic development. Amazon.com had started building a distribution center in Lexington County, South Carolina with the understanding that they would be exempt from collecting SC state sales tax (international readers, see sales tax primer at end), but a recent vote in the South Carolina House of Representatives quashed that implied promise, and now Amazon.com says it is pulling out of South Carolina...leaving behind a massive, half-built warehouse and an unfulfilled promise of 1200 jobs. I've given this a lot of thought and therefore am somewhat conflicted about the issue on a number Inception-like levels:


Since you are reading this on the Internet, you—like I—probably order stuff from online merchants on a regular basis. As such, we probably appreciate that nearly everything we order comes from another state, and therefore is free of sales tax. (Yes, I know I'm supposed to pay “use tax” on out-of-state purchases, but—really—who does that?) So, if Amazon.com came to South Carolina without this concession, everything I buy from Amazon (regardless of which distribution center it came from) would cost an additional 6%. Of course, I would not like that.


South Carolina, like every state (and nearly every government in the world) is suffering from budget shortfalls due in part to the recent economic upheaval. As a resident and tax payer, I would like to see more money joining my contribution to the states coffers so we can have “nice things” like other industrious states and countries have such as high-quality schools & universities, roads & other infrastructure, law enforcement, parks, etc. Therefore, at this level, I cringe that we were ready to forfeit this much needed revenue stream. (Granted, Amazon is never going collect or pay sales tax for any state.)


This distribution center would employ some 1,250 people in my area, undoubtedly there would also be multiplier effects as allied firms and other online retailers would consider this site, which—admittedly—is a great place for this type of business: minutes away from 3 interstate highways, regional postal, UPS, and FedEx hubs (who would probably also need to beef up their staff) within 5 miles, and plenty land for such expansion. Additionally, real estate values would go up in the area and new housing would probably be built. This would certainly benefit the economy of Columbia and of Lexington County. So, like many of my friends on Facebook and Twitter, I've got to be for that! However, I am not naive enough to think that 1,250 people will remain unemployed now; that's not the way a market economy works—there is no “lump of labor” that you just break a piece off. Lexington County already has one of the lowest unemployment rates in the state and is even lower than the national average.


Finally, there is the issue of fairness. Why should Amazon.com be exempt from collecting sales tax from South Carolina customers when all other retail businesses located in the state must do so? This is the argument of the business lobby that defeated this bill, and it is quite understandable. By not collecting SC sales tax, Amazon.com has an unfair competitive advantage.

While small business struggle to get established, nearly all states fight each other to land big businesses that promise to employ hundreds or thousands of its residents with generous concessions. They happily promise to forgo years of tax income, make commitments to upgrade infrastructure, create job training programs, and even loan or grant money and real estate to some firms. This is a legitimate economic development strategy that can create a successful technology cluster such as the one built around the BMW plant in Greenville, South Carolina. However, there is no guarantee of success, as seen by the now abandoned Mac Truck plant in Winnsboro, SC. So the question is, who should evaluate these opportunities? It seems to me that too often the big business draws up its own demands, and the local politicians immediately become cheerleaders regardless of how appropriate the project is for the long-term development of the region.

More importantly, I am interested in why underdeveloped states, regions, countries, or whatever need to prostitute themselves in front of industry in the first place. What disadvantages are otherwise turning away these industries, and what are the root causes of these negative aspects? I don't think that San Mateo and Santa Clara counties in California need to offer any special incentives to get technology firms to locate in Silicon Valley, nor does New York City have to do anything to keep the financial industry from leaving. Regardless of how sweet the incentives, the bulk of professionals in these industries would never move to some stiflingly boring Midwestern or southern state. I have written more about this previously in Promoting Innovation.

So, as I've said, I am conflicted about this; I wish states would collectively agree not to undercut each other, but I know this will never happen, so I guess I've got to pull for the home team and hope that some day in the future we will grow to the point where we don't need to introduce these market distortions.

Sales tax primer: In the United States, each state (and occasionally local governments as well) determines and collects a sales tax from 0% to 10% on all retail purchases (with some exceptions.) Unlike a value-added tax (VAT), this applies only to the final, end-user sale; manufactures don't pay this for raw material, and wholesalers don't collect it for sales to retailers. Also, this tax is only due from residents of the state in which the seller is located. While it is difficult to claim this exemption for small purchases you make when traveling to another state, mail order and e-commerce businesses simply don't charge it when shipping goods to an address outside of their state. (Oh, and to the consternation of foreign visitors, sales tax is almost never included in the posted price.)

Inception primer: The brilliant 2010 film Inception has spawned an Internet meme similar to “mind=blown” or “[insert strange twist], by M. Night Shyamalan” in which—to express how mind-blowing a concept is—you take almost any word that ends in “-ion”, put spaces between the letters, and make it bold. (e.g. Sales tax C O L L E C T I O N )

The film itself only makes sense when you realize [and this is not a spoiler] that the team has successive dreams within dreams, in which time exponentially slows down for each level, and if someone gets killed in a dream this person’s [un]consciousness goes to limbo, where time stretches out even more, such that DiCaprio’s character and wife spend a lifetime there one night many years ago. Also, since his wife has been dead for years, her appearance is merely a figment of his imagination, and thus her sabotage must be his self-flagellation.

UPDATE 5/21/2011: The South Carolina legislature relented and gave Amazon.com their sales tax exemption. Construction of their enormous warehouse (above) is moving along at a brisk pace. I'm happy that this major industry has located here, and I hope this area will become a distribution/logistics cluster. However I'm still uncomfortable that certain companies are allowed to ignore the obligation to collect sales tax from retail sales.

This American Life just had a brilliant show with the Planet Money team titled “How to Create a Job”; the main premise is that despite the big talk from politician and the economic development industry, they almost never create a job, they just shuffle them around from state to state. If you have a free hour, it's certainly worth the listen: (click here)