Amazon is deservedly lambasted for poor working conditions in fulfillment centers and its very public search for a second headquarters. It’s also faced complaints about anti-competitive practices. However, the most popular narrative is that the company pays no taxes.
Politicians on both sides like to scream that Amazon pays no federal income taxes. The reality is more complicated. The notion comes from Amazon’s income statement. Amazon shows an estimate of their tax liability on their public filings. In 2018, they recorded a $129 million refund. The next year they showed just $162 million on $13.9 billion of pretax profit.
There is legitimate argument over whether corporations as large and profitable as Amazon should be paying more. But for now, Amazon is unfairly vilified when they are merely complying with existing tax codes and playing by the same rules as other corporations.
Without seeing Amazon’s actual tax return, we can’t definitively say what they pay. There’s nothing illegal going on here; Amazon is paying all the required taxes. Corporate tax filings are confidential. Amazon’s public SEC filings are the only information we have about how what tax breaks they take and how they determine their tax liability.
To be clear, Amazon does pay all kinds of taxes. They reportedly paid $1.6 billion in state and local taxes, including “including payroll taxes, property taxes, state income taxes, and gross receipts taxes.” Like all public companies, Amazon has an outside auditor that reviews their financials and ensures Amazon is compliant with all tax laws. When people complain about Amazon’s lack of tax payments, they’re talking specifically about federal income tax.
So how does Amazon legally pay such little federal income tax? There are four main pieces of tax code and one new law:
R&D Credits:
Creating new business products and processes is expensive and time consuming. To encourage re-investment of corporate profits, Congress introduced the Research and Development (R&D) Tax Credit as part of the Economic Recovery Act of 1981. It was originally enacted to “incentivize innovation throughout the economy and to keep technical jobs here in the US”. It was extended several times before becoming permanent in 2015.
Amazon includes R&D in the Technology and Content line item on its income statement but doesn’t break out R&D from the other costs included (Note 1). Amazon spent $28.8 billion on Technology and Content in 2018, and $35.9 billion in 2019.
The 10-K notes that the 25% increase is “primarily due to an increase in spending on technology infrastructure and increased payroll and related costs associated with technical teams responsible for expanding our existing products and services and initiatives to introduce new products and service offerings” (emphasis added).
In 2019, Amazon used $466 million of tax credits, “primarily related to the U.S. federal research and development credit.” There is a valid criticism that tax credits for R&D rewards companies for investments they would make regardless. Yet this isn’t Amazon’s fault. They are simply taking the credits they’re allowed.
Carryforward Loses:
Companies only pay income taxes on their profit. If a company is unprofitable, then they don’t pay any income tax. The tax code allows companies to carry forward some of their losses from one year to offset their tax liability in their next profitable year.
Amazon has been a public company for 22 years and failed to turn a profit in 8 of them (36%). Now that they are consistently profitable, the accumulated losses from earlier years are helping to reduce their taxable income.
The carryforward rules apply to R&D credits too. If a company can’t take advantage of all the credits they’re eligible for, they can carryforward unused credits into future years. Amazon notes that they have “approximately $1.7 billion of federal tax credits potentially available to offset future tax liabilities.”
Recency bias is a hell of a drug. People forget that Amazon is a retailer with very thin margins, and that they lost money or were barely profitable for a long time. Now that they are consistently profitable, they’re able to use their previous losses to reduce their taxes.
Stock-Based Compensation:
Like many tech companies, Amazon offers stock as part of employee’s compensation. Paying employees and executives a piece of the business helps align the interests of the employee with those of the company.
When Amazon awards employees stock, they need to record that as an expense on their income statement. They estimate the future value of the stock redemptions at current market value when it’s awarded. Most stock at Amazon vests over several years, leading to large write-offs as the stock value rises. The Wall Street Journal explains this succinctly:
“If a company awards restricted stock worth $20, it records a $20 expense and assumes it will get a $20 tax deduction. But if the stock price rises and it vests at $35, the company then takes a larger-than-expected tax deduction.”
This works the other way around too. If the stock declines, the value of the deduction will be less than the company thought, and the company will owe more taxes.
Amazon claims that the tax benefits for stock-based compensation was $1.1 billion in 2018 and $1.4 billion in 2019. This benefit comes from issuing lots of stock grants and from a rising stock value.
Deferral of Taxes:
Amazon recorded $1.1 billion as their provision (estimate) for US federal income taxes in 2019. They only estimate paying $162 million in 2019, with the $914 million balance deferred to future years. Companies would always prefer to defer as much tax as they can because they can use the cash saved now to pay for new product development. Due to accounting rules and the differences between financial reporting and tax reporting, companies can defer taxes for several years.
In 2018, when Amazon got a tax refund of $129 million, they actually had a total tax bill of $436 million. They were due a refund in 2018, but they are still on the hook for another $565 million of income taxes. This will be paid out in future years. The notion that Amazon paid nothing in federal income taxes in 2018 is only somewhat true; They paid nothing in 2018, but they will still have to pay taxes on their profits from 2018. This is true for other companies that received a rebate in 2018 as well.
Recall that Amazon’s public disclosures do not include their actual tax return. The tax expenses listed on their annual statements are estimates based on several factors, and the amount they actually pay may be different. Amazon’s tax filings are confidential, so we don’t know how close their actual payments are to the current income tax expense they list on their financials. This caveat is important to remember when people claim to know how much Amazon paid in federal income tax.
Tax Cuts and Jobs Act:
The tax breaks above all existed prior to Tax Cuts and Jobs Act of 2017. However, the TCJA did lower the corporate rate from 35% to 21% and expanded existing depreciation rules, enabling Amazon to lower their tax bill further. It also included a tax on overseas profits, but at a fairly low rate.
When companies invest in hardware and machinery, they record the expense over the useful life of the assets. Previously, companies could write off 50% of the costs on their tax returns in the first year to encourage investment. The TCJA increased this up to 100% until 2022, after which it will phase out. In Amazon’s words:
“The U.S. Tax Act enhanced and extended accelerated depreciation deductions by allowing full expensing of qualified property, primarily equipment, through 2022”.
For years, companies deferred profits overseas where they were safe from the US taxes. Repatriating funds back to the US would cause the earnings to be taxed at the old corporate rate of 35% (Note 2). The TCJA instituted a one-time mandatory tax on the earnings that were sitting outside the US. When the TCJA collected this one-time tax, they taxed earnings held in cash at 15.5% and everything else at 8%, far less than the old rate of 35%. For Amazon, “the amount of this one-time tax was not material”. Amazon was even able to collect a $789 million benefit because they had previously estimated that they would need to pay tax at the higher rates:
“We recorded a provisional tax benefit for the impact of the U.S. Tax Act of approximately $789 million. This amount was primarily comprised of the remeasurement of federal net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%, after taking into the account the mandatory one-time tax on the accumulated earnings of our foreign subsidiaries”.
Going forward, all foreign earnings will be taxed at the 21% rate whether the cash stays abroad or not.
Complaints about federal income tax are loudest with Amazon, but they aren’t an exceptional case. Low corporate tax bills are common. Amazon receives most of the bad publicity despite these tax rules benefiting many companies. Netflix received a $22M rebate in 2018 and estimated a tax payment of $21.5M in 2019 on profit of $1.7 billion before taxes.
It’s not just a tech industry issue either. The Institute of Taxation and Economic Policy studied 379 Fortune 500 companies and found that the 2018 effective tax rate was just 11.3%, just more than half the 21% nominal rate. In fact, 91 profitable Fortune 500 companies paid no federal income taxes at all.
These companies are benefiting from strategies similar to the four outlined above. Per a Moss Adams report, more than 100,000 US companies "claimed Over 100,000 US companies “claimed more than $12 billion in federal R&D credits in 2014”.
As of 2015, there were $2.6 trillion of accumulated earnings sitting in foreign subsidiaries. The TCJA’s one-time tax on foreign earnings benefited all companies with overseas profits. These companies paid drastically less in taxes than they thought they would.
There’s a lot of debate over whether cutting taxes for corporations really spurs re-investment and growth, but what’s not debatable is that Amazon takes a lot of heat when they are far from an outlier.
A 401k account is an incentive to save for retirement. The government hopes that the ability to lower your current tax bill will push you to invest for a retirement that could be decades away. Tax breaks for companies are the government’s way of incentivizing behavior that Congress believes will benefit the United States economy.
It’s very fair to think that massive corporations should be taxed more. The key distinction is that the finger of blame shouldn’t be pointed at Amazon. It should be pointed toward D.C. Politicians on both sides have criticized Amazon, yet they are the people who can change the rules. Amazon is certainly involved in some questionable business practices, but tax avoidance is not one of them.
Companies, like individuals, don’t want to pay more tax than necessary. You and I both take every deduction possible. Corporate America is the same; they are simply doing what we want them to do. They are responding to the incentives set out by the Government and making business decisions accordingly. Any discussion of low corporate tax bills must begin with the rules and who writes them.
Amazon is criticized from a lot of different angles. That comes with the territory when you capture half of all internet sales. Being the face of corporate America means taking condemnation for the same things other corporations are doing. Anger about how the tax rules are designed and used shouldn’t be levied on Amazon, who is simply responding to incentives the same way you or I would. Perhaps Amazon should be paying more taxes, but the onus should be on the rule-makers rather than the rule-followers.
Notes:
For all figures and quotes without a link, the source is Amazon's 2019 10-K annual report:
Note 1:
Amazon includes R&D in its Technology and Content line item, but it doesn't specify exactly what is R&D. Here is everything included in that line item:
“Technology and content costs include payroll and related expenses for employees involved in research and development of new and existing products and services, development, design, and maintenance of our stores, curation and display of products and services made available in our online stores, and infrastructure costs. Infrastructure costs include servers, networking equipment, and data center related depreciation and amortization, rent, utilities, and other expenses necessary to support AWS and other Amazon businesses.”
Note 2:
Repatriated profits were taxed at the old corporate rate of 35% less a credit for foreign taxes already paid on those profits.