Amazon.com Inc. does not plan to pay the IRS anything this tax season. Yet that’s not largely because of President Donald Trump’s tax overhaul.
The world’s largest retailer simply took advantage of long-standing, low-profile tax deductions. It paid its employees in stock, built new warehouses and tapped tax breaks from when the company wasn’t profitable.
Amazon’s projected $129 million refund highlights how companies can harness the complexities of the U.S. tax code for their own benefit. As a tech company with highly appreciated stock that also relies on brick-and-mortar fulfillment centers and shipping hubs, Amazon is uniquely situated to use the full range of preferences baked into the tax laws.
And it wasn’t an unusual bumper year in 2018 that led to Amazon’s $0 tax bill. It didn’t pay any federal tax in 2017, either.
That sweet situation feeds into the public’s annoyance that a company with more than $232 billion in revenue and led by the world’s richest man — Jeff Bezos — doesn’t pay more in taxes.
That annoyance boiled over in New York earlier this month when Amazon, which had been offered as much as $3 billion in tax incentives to build a second headquarters in Queens, dropped the plan amid fierce opposition from local politicians and community activists.
“I get the frustration out there, but it’s not like they’re doing anything illegal,” Brian Yarbrough, a senior equities analyst at Edward Jones, said. “It’s how the tax law works.”
Despite having hundreds of billions in revenue, the company only booked about $9.4 billion in profit in 2018, creating a significantly smaller base on which taxes and offsetting credits and deductions are applied. The company says it pays all required federal, state and international taxes.
“Corporate tax is based on profits, not revenues, and our profits remain modest, given retail is a highly competitive, low-margin business,” Amazon said in a statement, adding that it’s continuing to invest in its operations.
Amazon gets both the benefits usually used by technology companies — deductions for paying employees in stock — as well as the write-offs for companies that rely heavily on building physical infrastructure.
The research and development credit — designed to encourage innovation in the U.S. — also amounts to up to a $419 million tax break for Amazon. Add in hundreds of millions of losses the company still has on its books held over from years before it turned a profit, and its U.S. corporate tax liability can be whittled down to zero.
These tax reductions, however, are largely unrelated to the overhaul that Congress passed and Trump signed in 2017. Amazon benefited from the new, lower corporate rate, 21 percent down from 35 percent, and expanded write-offs for capital investments. Yet some of the biggest tax minimizers — deductions for employee stock options and research and development, are long-standing fixtures to the code that didn’t change under the new tax law.
One of the biggest factors changing Amazon’s financial filings isn’t a substantive change at all. A deduction for stock-based compensation, totaling nearly $1.1 billion in 2018, is now more prominently displayed in regulatory filings thanks to an accounting rule change.
“The tax law didn’t change one iota,” Robert Willens, a tax consultant based in New York, said. “It’s all a matter of presentation.”
And in the end, the U.S. government is better off because Amazon employees end up paying more in tax than the company can write off. Companies take that deduction off their profits taxed at a 21 percent rate. Employees must pay tax on the income they receive from those shares at rates that top out at 37 percent.
The fact that Amazon can legally reduce its tax bill to nothing calls into question the effectiveness of the code, said Matthew Gardner, a senior fellow at the Institute of Taxation and Economic Policy. While those breaks have the backing of Congress and were implemented for some social or economic policy goal, they might be encouraging corporate action that would happen anyway, he said.
Other profitable companies, including Netflix Inc., General Motors Co. and Prudential Financial Inc., are able to use tax breaks to completely offset their tax bill, Gardner said.
Netflix spokesman Richard Siklos said the subscription streaming service’s tax break was reduced by standard tax breaks and that they anticipate their tax rate to be higher in 2019. Prudential said in a statement that it prepaid some of its taxes and follows all tax requirements. GM did not respond to a request to comment.
“If you want to be mad, be mad at the people who wrote the tax code,” Yarbrough said.
— With assistance from Spencer Soper
