Amazon and taxes, oh my!


Jeff Bezos has bigger problems than the Queens pull-out and criticism of Amazon’s taxes. He may want to wipe that smug look off his face.  Photo from Forbes. 

Amazon backed out of its selection of Queens, NY as a location for a new headquarters this week.  It was a big story, revolving around new Queens/Bronx Congresswoman Alexandria Ocasio-Cortez for some strange reason.

But I was not focused on that story, although I have an opinion on it that I share with Professor Luigi Zingales of The Stigler Center at the University of Chicago Booth School of Business.

Subsidies to Amazon Are Uneconomical, Un-American, and Unconstitutional

Corporate subsidies are a negative-sum game. They foster crony capitalism, hurt productivity growth and inflict great harm on product market competition.

When companies compete for customers, they have to offer better products or lower prices. They are forced to innovate and improve efficiency in production. In economist lingo, product market competition is not a zero-sum game (my gains are equal to your losses), but a positive-sum game (my gains exceed your losses). By contrast, corporate competition for state subsidies is a zero-sum game. Amazon is not going to be more productive in New York than in New Jersey –it will only pay fewer taxes. If companies are successful in pitting one state against another, they will end up paying no state taxes. As a result, the economy will not be one iota more efficient, and the rest of us will end up paying more taxes to make up for the revenue shortfall. 

Competition for subsidies also fosters crony capitalism and hurts productivity growth. It fosters crony capitalism because it favors companies that are well-connected, rather than companies that are more efficient.      


I was focused on Sen. Bernie Sanders’ and Rep. Alexandria Ocasio Cortez’s campaign against Amazon for “paying $0 federal taxes.” Unfortunately this trope was picked up by all kinds of outlets and repeated verbatim with no one looking into whether or not it was actually correct.

It was not entirely correct.

Amazon riled up the left for not paying federal taxes — and it’s in a position to offset future profits, too

Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez slammed Amazon for getting a federal tax refund despite booking billions in profit the last two years.

A close look at Amazon’s finances shows the Vermont independent and Bronx Democrat will have more to get upset about, because the internet giant has billions of dollars in various credits it could apply to offset future taxes as well.

As of Dec. 31, Amazon had federal operating loss carryforwards of $627 million, foreign balances of $7.8 billion, and state balances of $919 million.

Net operating loss carryforwards are created when a company’s deductions for the year are more than its income. Companies can use a federal tax loss carryforward by deducting it from their income in another year or years.

If not utilized, a portion of the federal, foreign, and state net operating loss carryforwards will begin to expire — some as early as the end of this year — which means you can expect to see Amazon report at least enough net income in 2019 to take advantage of the foreign and state net operating loss carryforwards rather than allow them to expire unused.


Using $11.2 as profit number is also disingenuous. $11.2 billion is Amazon’s pre-tax net income. They made a provision for income taxes of $1.2 billion reducing their net profit number for reporting purposes to $10.0 billion and paid out $1.2 billion in cash for taxes in 2018.

— Francine McKenna (@retheauditors) February 17, 2019


I called this move before:

I wrote this in 2013.

Amazon Minimizes Profits Because CEO Jeff Bezos Hates Paying Taxes

Amazon CEO Jeff Bezos claims the company eschews profits so “free cash flow” can drive growth. Investors can’t see what cash is spent on, but do see a volatile stock price and no dividends. Bezos’ actual strategy is much more mundane: skim the cream and leave nothing for the tax man.

Technology companies often say profits aren’t the only thing. Focus on growth, especially of a company’s “free cash flow”, and earnings will eventually follow.

Recently Benedict Evans, of VC firm Andreessen Horowitz, suggested that it’s not as important whether consistently profit-poor Amazon and its CEO Jeff Bezos can “capture the future” but instead, “How long are you willing to wait?”

Evans says Amazon, the granddaddy of growth and market share over short-term profits, is brilliant for putting every last bit of earnings back into its business. Evans thinks “someone at Amazon has the job of making sure that each quarter, this nets out to as close to zero as possible, at least as far as net income goes.” And Evans doesn’t seem to see any problem with someone doing that.

I agree with Evans’ conclusion. There are few other ways to achieve consistently equal revenue and expense lines than by hands-on management of the results. CEO Jeff Bezos wants Amazon to be the biggest and best retail organization in the world. But I believe Bezos and his team massage the numbers each quarter to minimize profit for a bigger reason.

Amazon reports little or no profit because Jeff Bezos hates paying taxes, on his own income and Amazon’s.

 Amazon is audited by Ernst & Young.  Amazon is EY partner David Cyril Heselton’s only lead assignment per PCAOB Form AP and he is EY’s Global Client Service Partner and Seattle Office Assurance Leader. 


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