Business Update with Mark Lacter

How Amazon.com's sales tax will affect brick-and-mortar stores in California

KPCC's business analyst Mark Lacter says the new Amazon.com sales tax doesn't necessarily mean good news for brick-and-mortar stores.

Steve Julian: Mark, from now on if I buy something on Amazon, I'll have to pay tax. Brick-and-mortar retailers are happy about this, right?

Mark Lacter: Be careful what you wish for, Steve. Yes, Amazon is now being forced to tax California shoppers for their purchases, which is what the non-Internet retailers in the state had been lobbying for, and which is expected to bring in lots of extra tax revenue. And that's certainly good news considering how cash-strapped the state is, but there's another side to this development. Amazon is now building huge distribution warehouses outside of Los Angeles and San Francisco - much closer than the facilities that are now used. And, what Amazon plans to do with those warehouses is provide faster delivery - they want to cut shipping times by as much as a day. Actually, for certain items like books you might have noticed that your items are coming quicker already.

Julian: Are they shooting for same-day service?

Lacter: They're trying it out in San Francisco, Chicago, New York, Las Vegas, and several other cities. Amazon is able to do same-day delivery in cities that are close to fulfillment centers. Now, same-day delivery is significantly more expensive (it's $9 and up per delivery, so that's going to turn off some shoppers), and in some locations you need to order by 7 in the morning. In others (Southern California, for example), it's not being offered - at least for now - because of distances and, of course, traffic. So, this is still very much a work in progress.

Julian: Still, brick and mortar business owners can't be very comfortable now...

Lacter: Even a nominal reduction in delivery times would be a killer for them because, let's face it, immediacy is one of the few remaining advantages they bring to the table. That, and being able to examine a product or try it on. Of course, there's a risk for Amazon, as well. Setting up these distribution centers is expensive - and yet, the company can't make up those costs by jacking up prices for shipping. As it is, profit margins tend to be thin. So, the trick for Amazon is how to make money and still deliver the product as cheaply and as quickly as possible. And for the offline retailers, it's figuring out how to keep people coming into the stores.

Julian: State officials have reopened their trade mission in China...

Lacter: That's right - these trade offices have gotten a bad rap over the years because they were considered kind of a government boondoggle. This time around, state officials are establishing an office in Shanghai that will be paid for by a San Francisco business group - so, no worries about political fallout. Having a state presence in China is especially important these days, not only because of American businesses investing there, but because of Chinese businesses investing here. You know Chinese investors are becoming a very big deal all over the United States - and particularly in Southern California.

Julian: Where are we seeing them become entrenched?

Lacter: Well, we've talked about the Chinese corporation buying the AMC movie theater chain for $2.6 billion. But, that's not the way it usually happens - usually, investments are smaller and involve minority stakes in U.S. firms. It could be office buildings and shopping malls or factories that make products that are shipped to China. There's something else going on, Steve: a U.S. government program that offers green cards to folks who invest $1 million in a U.S. commercial venture. All they have to do is generate at least 10 jobs over a two-year period. In high unemployment areas, they only need to cough up $500,000. Chinese investors are using the program a lot, and for U.S. developers still struggling to get construction loans from banks, it's a way to get financing.

Julian: Any examples?

Lacter: Yes, the Marriott Hotel under construction near the L.A. Live complex is being financed through this program. You know there's been some political sniping in the last few days over U.S.-China trade policies, but here's an unheralded program that's been good for both countries.

Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.


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