Tax deal paved way for Amazon’s ultra-quick deliveries in Sacramento

This June 4, 2014 file photo shows Amazon boxes in Phoenix. reported a surprise second-quarter profit Thursday, July 23, 2015, on continued strength of its cloud-computing business and strong revenue both domestically and abroad.
This June 4, 2014 file photo shows Amazon boxes in Phoenix. reported a surprise second-quarter profit Thursday, July 23, 2015, on continued strength of its cloud-computing business and strong revenue both domestically and abroad. AP

It’s the next giant leap in e-commerce: Sacramentans can now get their shipments, everything from batteries to bottled water to Ninja Turtle toys, delivered to their homes in as little as one hour.

For that, they can thank a grand compromise Amazon forged five years ago with Gov. Jerry Brown and the California Legislature, settling a longstanding tax dispute and paving the way for lightning-fast deliveries.

Amazon announced Thursday that its Amazon Prime Now delivery service has expanded to the Sacramento area, plus Phoenix and Las Vegas. A total of 19 markets in the United States now have the service, which was launched 10 months ago in Manhattan.

The program offers two-hour deliveries for free and one-hour deliveries for $7.99. There are restrictions: It’s limited to members of Amazon Prime, and is only available on mobile Apple and Android devices. Amazon Prime is the company’s $99-a-year service that offers free two-day shipping.

Prime Now is the latest manifestation of Amazon’s effort to shrink delivery times to its most loyal customers and grab an even bigger share of their shopping budgets.

“They’re focusing increasingly on becoming the ‘everything store’ for Prime members,” said Anne Zybowski of Kantar Retail, a global consulting firm. “They’ve seen really strong growth with Prime Now.”

Amazon said much of the greater Sacramento area is covered by Prime Now, including Carmichael, Elk Grove, Davis, Rocklin and Roseville. The service was already available in California’s most crucial markets – the Bay Area, Los Angeles and Orange County – and is continuing to spread to other cities around the country.

Amazon spokeswoman Ashley Robinson said there are “many more to come.”

It wouldn’t be possible without a major strategic move Amazon made several years ago. That’s when the Seattle e-commerce giant began building a slew of mega-warehouses adjacent to major cities coast to coast, bringing the retailer closer to its customers.

To make that happen, Amazon had to give up on a crucial fight. After years of resisting, it agreed to start collecting sales tax from consumers in the states where it built warehouses.

The connection between warehouses and taxation was the product of years of legal and political squabbling. The U.S. Supreme Court ruled in 1992 that catalog merchants and other out-of-state retailers couldn’t be forced to collect sales tax unless they had a physical presence in the state where the customer lived.

When Jeff Bezos founded Amazon in 1995, he used that ruling to build a financial advantage over brick-and-mortar retailers. He thought about making Amazon’s headquarters in the Bay Area, but realized he didn’t want to have to charge sales tax from consumers in the most populous state in the country. That’s why he chose Seattle, in relatively unpopulated Washington state.

Brick-and-mortar merchants howled about Amazon’s sales-tax status, which helped the company sell its products more cheaply. Legislatures in several states looked at ways of enacting e-commerce sales tax laws that got around the Supreme Court ruling, but without success. California lawmakers passed two bills taxing e-commerce, but they were vetoed – first by Gov. Gray Davis in 2000 and then by Arnold Schwarzenegger in 2009.

In 2011, however, California appeared to put a dent in Amazon’s armor. Gov. Jerry Brown signed a bill that said an e-commerce company’s California “affiliates” counted as a physical presence in the state, satisfying the old Supreme Court ruling and forcing Amazon to charge sales tax from California customers. Affiliates are online businesses and nonprofits that earn commissions by referring their web visitors to Amazon and other e-merchants.

With an estimated $150 million in annual tax revenue at stake, Amazon went to war over the California law.

The company fired its thousands of California affiliates. That didn’t matter, California officials said: Amazon still had a handful of subsidiaries with physical offices in California, including a Silicon Valley location where engineers designed products like the Kindle. The company had to charge sales tax in California, the state declared.

Then Amazon upped the stakes. It launched a ballot referendum to get the law overturned. State lawmakers vowed to defend the new law.

Three months later, in September 2011, the two sides declared a truce. The state gave Amazon a one-year reprieve on collecting sales tax. The company dropped the ballot fight, rehired its affiliates and promised to build enough distribution centers in California to employ 10,000 workers.

Amazon made good on the pledge. In fairly short order, it opened warehouses in Tracy, Patterson, Redlands, San Bernardino and Moreno Valley.

The company has cut similar deals elsewhere, agreeing to start collecting sales tax in New Jersey, Pennsylvania, Texas and other major states as it rolled out an ambitious program of warehouse construction. In just a few years, it expanded its warehouses from eight to 50.

At the time of the California compromise, Amazon was rolling out two-day shipping in much of the country and was just starting to bring one-day shipping to a few major markets. Now the company has one- and two-hour shipping available in Sacramento and 18 other markets through Prime Now. Its AmazonFresh service delivers perishable groceries in parts of the Bay Area, Southern California, the Pacific Northwest, New York and Philadelphia.

“They continue to push the envelope on expectations of what ‘immediacy’ means,” Zybowski said.

The strategy has come at a cost. Amazon’s profits have been depressed by the cost of building warehouses. Zybowski said the expense of other initiatives, such as its streaming-media services, has also eaten into earnings. But in its latest quarter, Amazon earned a $79 million profit on sales of $25 billion. That was a huge improvement on the same quarter a year earlier, when Amazon lost $437 million on $20 billion in sales.

“It is really starting to pay off,” said Scot Wingo of ChannelAdvisor Corp., an e-commerce consulting firm based in North Carolina. “That’s starting to really show in the bottom line.”

He said the next frontier is something called Amazon Flex, an Uber-like program in which independent drivers bid through mobile apps to make individual deliveries to Amazon customers. The program is available in Seattle and is scheduled to expand to New York, Baltimore, Miami, Dallas, Austin, Chicago, Indianapolis, Atlanta and Portland.

Wingo said Amazon is growing nearly twice as quickly as other e-commerce companies. “I don’t think Amazon would be growing at the pace they are ... without these kinds of innovations.”

Dale Kasler: 916-321-1066, @dakasler