Understanding the "Amazon Paid No Taxes" Claim
You’ve likely seen the numerous memes and headlines circulating claiming that Amazon paid no income taxes in 2017. Below, we’ll walk through exactly what happened and how.
For starters, understand that Amazon DOES pay income taxes. Per their SEC filings, they paid $562 million in Federal/State income taxes in 2012 [a], $144 million in 2013 [a], $279 million in 2014 [a], $452 million in 2015 [b], and an incredible $1.344 BILLION in 2016. And this is just Federal and State income tax, it doesn’t even count the millions of income taxes owed to foreign jurisdictions.
So what happened in 2017? Essentially, they paid millions of income taxes to state governments and to foreign governments, but zeroed out their federal taxes largely through one-time benefits that aren’t likely to reoccur en masse. Here are the taxes broken down:
• Income tax owed at federal statutory rate:
- $1,332,000,000
• Income tax owed at state’ statutory rate:
- $114,000,000
• Impact of Foreign Tax Differential:
- $1,178,000,000
• Other unspecified income taxes:
- $71,000,000
TOTAL OWED BEFORE REDUCTIONS:
$2,695,000,000
This is what Amazon would have owed in Federal, State, and Foreign income taxes if there were zero deductions, credits, or deferred tax benefits allowed. Below, we will show you how they reduced this.
• Subtract Tax Credits:
- $220,000,000
• Subtract Impact of 2017 Tax Act:
- $789,000,000
• Subtract Effect of Stock-based Compensation:
- $917,000,000
TOTAL OWED AFTER REDUCTIONS:
$769,000,000
As you can see, after subtracting all of the above, they still ended up paying $769 million in income taxes. This money went either to foreign countries that Amazon does business in or to State governments, but it’s true that they successfully offset the amount owed to our Federal government. As demonstrated above, they accomplished this through 3 avenues: generic deductions/credits, the 2017 Tax Act, and benefits from stock-based compensation. Let’s explain how…
GENERAL DEDUCTIONS/CREDITS:
Contrary to widespread assumption, this was actually the smallest of the three ways Amazon reduced its tax liability. Had they ONLY used these reductions, they would have still paid millions in federal taxes. Nevertheless, let’s review them. Per their SEC filing, as of December 31, 2017, Amazon had a federal net operating loss carryforward of approximately $226 million, since they had losses from prior years.[b] When a business reports a net operating loss, it can be used in later tax reporting periods to offset taxable income. [c] Furthermore, Amazon had amassed approximately $855 million of federal tax credits potentially available to offset future tax liabilities. [b] This was primarily related to the U.S. federal research and development tax credit. [b] This is noteworthy since R&D costs incurred in years when a company has no income can be carried forward to offset tax on future profit. [d] In most cases, these tax credits can carry forward for up to 20 years. [d] There were also “deferred tax benefits,” which arise when a business overpays taxes in the past (usually when using estimates to pay taxes in advance). These overpaid taxes are eventually returned to the business in the form of tax relief. In 2017, for instance, Amazon had $202 million in deferred federal tax BENEFITS and $26 million in deferred state BENEFITS. [b] Companies aren’t required to apply all benefits/credits at once, but this year, they used $220 million of them. This is standard practice and is largely justified given that investments made in the past take years to finally pay off, and R&D credits are often awarded when a firm creates something innovative for the production line or consumer, so companies willing to invest in innovations will often record losses for years - and therefore earn tax credits they can’t cash in until their investments turn profitable.
IMPACT OF 2017 TAX CUTS:
There was a onetime $789 million tax benefit Amazon received from Trump’s 2017 tax cut. While the tax cuts generally took effect on January 1st of 2018, “the law includes a grandfather clause for companies that (like Amazon) have managed to defer or postpone tax liability from prior years.” [e] Because the tax rate dropped from 35% to 21%, Amazon was able to claim the difference as a benefit. In addition to that, the Tax Act enhanced the option to “claim accelerated depreciation deductions on qualified property.” [b] “This is the [major] source of Amazon’s $789 million benefit.” [e] Since many are citing Amazon as “proof” that corporations get away with highway robbery, it’s relevant to note that this benefit is strictly a one-time deal and does not reoccur every year.
STOCK BASED COMPENSATION:
It’s common for firms to offer stock options as some form of compensation. Under standard accounting rules, companies calculate the fair market value of these stock options on the date they are granted and report that value as an expense. However, “the Internal Revenue Service allows companies to claim a tax deduction for any increase in value when those options are exercised, usually years later at a much higher price. The tax savings are listed in regulatory filings as excess tax benefits from stock-based compensation. [f] In other words, if a company’s stock increases in value from the time it was given to an employee to the time it was exercised (bought or sold by the employee), the tax deduction will be greater than the initial deduction on the accounting books. This results in lower taxes, and thus an excess tax benefit that can show up later. Note, this only happens en masse if a company’s stock is sky-rocketing due to widespread success over that specific period of time. It could also just hover around the same value and therefore likely not result in any change to taxes (since people aren’t likely to exercise a stock option if they see no value in buying or selling it).
"For example, in the dark days of June 2009, Mel Karmazin, chief executive of Sirius XM Radio, was granted options to buy the company stock at 43 cents a share. At today’s price of about $1.80 a share, the value of those options has risen to $165 million from the $35 million reported by the company as a compensation expense on its financial books when they were issued. [f] …If he exercises and sells at that price, Mr. Karmazin would of course owe taxes on the $165 million as ordinary income. The company, meanwhile, would be entitled to deduct the full $165 million as compensation on its tax return, as if it had paid that amount in cash.” [f] This is justified “because they are deducting the cost of paying an employee, just as they would if they paid a salary in cash.” [f] Amazon’s SEC filing specifically shows this, saying “For 2017, our tax provision includes $1.3 billion of excess tax benefits from stock-based compensation.” To be clear, this field was not a tax benefit in prior years, but instead was a tax liability (meaning they paid the government). It only worked out in 2017 because of the company’s skyrocketing stock value. As of 12/30/16, Amazon’s stocks closed at 766.47. A year later, however, on 12/29/2017, they closed at 1182.35. That’s an increase of 54.26%. [g] The exorbitant growth of Amazon in recent months (it’s doubled its stock value in the last 18 months for instance) resulted in this form of compensation yielding a net tax deduction as opposed to a net tax owed. This is natural, if you think about it, since people would understandably wait to cash in stock options until the price was on an upward trend. Again, since people are referencing Amazon as an example of what’s “wrong” with the system, it’s relevant to point out that this is largely a one-time deal. Amazon hovered around the same stock price for years before it finally spiked. Companies do not continue to spike forever. They will likely experience one era of incredible growth and then plateau. The point is, this benefit will not be there year after year, so citing it as though it were is a form of cherry picking.
CONCLUSION:
Amazon certainly did avoid paying federal income taxes - one year. But it did so in a way that’s largely irreplicable in future years, and therefore isn’t a sign of some long term systemic problem. Amazon also paid millions of income taxes to other jurisdictions in 2017 and has paid millions in federal income taxes in prior years. Let’s be honest about this, it’s a one-time thing.
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Sources:
[a]
https://www.sec.gov/Archives/edgar/data/1018724/000101872415000006/amzn-20141231x10k.htm
[c]
https://www.accountingtools.com/articles/2017/5/15/the-net-operating-loss-carryback-and-carryforward
[f]
http://www.nytimes.com/2011/12/30/business/tax-breaks-from-options-a-windfall-for-businesses.html