Amazon‘s $175 million strategic investment in LivingSocial is certainly nothing to sneeze at. But it’s fair to ask why the company didn’t go a step further and buy the startup outright.The price tag wouldn’t have been prohibitive: Amazon has $5.8 billion in cash and short term investments. The two companies are reportedly planning to integrate their sites in important ways. So why not go all the way?
Here’s one reason: sales tax.
Amazon currently collects zero sales tax on behalf of most U.S. states. Retailers are only required to collect sales tax for states in which they maintain a physical presence. When you order something from Amazon, you theoretically still owe your state sales tax, but you would have to report it and turn it in yourself. That obviously doesn’t actually happen in most cases.
This is a huge competitive advantage for Amazon over brick-and-mortar retailers who do have to collect taxes. It also drives the states crazy — Amazon is constantly in court defending this exemption.
Other recent Amazon acquisitions — Diapers.com, Zappos, and Woot — have most of their employees concentrated in one or two states. But, like all Groupon-style companies, LivingSocial relies on having a massive sales force with feet on the ground in every market in which it operates.
If Amazon acquired LivingSocial outright, those would all be Amazon employees. And Amazon would be on the hook for taxes nation-wide.
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