Commentary, NC Budget and Tax Center

Amazon and other merchants could get a big tax break from House budget

A provision way down on page 351 of the House Budget could deliver big tax breaks to distribution companies like Amazon. It is difficult to say how many companies this provision would benefit, or how much revenue state and local governments stand to lose, but these types of special tax deals often cost more and deliver less than promised.

The provision (SECTION 38.9) would exempt “sales of equipment, or an accessory, an attachment, or a repair part for equipment” to “a large fulfillment center” from North Carolina sales tax. To qualify, a distributor must invest at least $100 million and create 400 jobs within five years.

As a general rule, building economic incentives into the tax code is risky business. Once written into tax law, these types of provisions can turn out to be much more expensive than originally thought and can be very difficult to eliminate, even if they aren’t delivering a substantial return on investment. There has not been time to fully vet the current House language, but it is certainly possible that smart accountants and fancy lawyers can find ways to bend these provisions beyond their initial purpose.

While the language does not mention any companies by name, it appears to be designed to benefit retail giants like Amazon, Wal-Mart, and Target. The provision restricts the sales tax exemption to facilities that are primarily used to fulfill consumer orders for retail goods, which would leave out many types of warehouse and distribution operations. This limitation, coupled with the relatively large size of the investment needed to qualify, narrows the universe of companies that are likely to take advantage of the tax break to a handful of large consumer goods retailers.

There is also reason to doubt whether warehousing and distribution centers will deliver reliable, good-paying, jobs in the future. Distribution warehouses are prime targets for automation, with robots poised to replace human handlers across much of the industry in the not-too-distant future. Even if a warehouse built today employs the 400 people required to qualify initially, many of those jobs could be automated out of existence within the next few decades. These transformations in distribution have not fully materialized yet, so this remains a speculative concern, but it is still worth considering when we deliberate whether to devote public funds to these types of economic development projects.

With all of these concerns, it is worth pumping the breaks. There may be situations where providing incentives to distribution centers makes economic and fiscal sense, but there has not been sufficient discussion to sort out whether the current language achieves those ends.

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