A report that tech behemoth Amazon is unlikely to pay federal income tax for 2018 recently set off a firestorm. How could a company with record U.S. profits for the year avoid paying up while most Americans can’t?
The answer is a combination of existing tax rules that have enabled Amazon, and companies like it, to avoid paying well below the standard corporate tax rate for years. And the company is also getting a little help from new provisions in Trump administration’s tax reform bill, which became law in 2017.
While nobody is disputing that these methods are legal, Amazon’s tax holiday highlights what critics claim are flaws in an unbalanced, loophole-ridden corporate tax system. Pro-business observers, on the other hand, describe the situation as the tax code working as intended—to provide companies with incentives to invest in their own operations, which in turn creates jobs and grows the economy.
Amazon’s expected tax avoidance comes despite it nearly doubling its U.S. profits to $11.16 billion in 2018, according to the Institute on Taxation and Economic Policy (ITEP), a nonpartisan tax policy-focused think tank. In fact, instead of paying any federal income taxes, the company received a $129 million tax rebate from the government.
The data is based on Amazon’s public filings with the Securities and Exchange Commission and does not, as ITEP senior fellow Matthew Gardner tells Fortune, necessarily reflect what the company will actually report to the Internal Revenue Service. The group’s conclusion represents “the best approximation,” he says.
The Washington, D.C.-based think tank’s calculations have triggered a back-and-forth about the U.S. corporate tax code, which the Trump administration revamped as part of the Tax Cuts and Jobs Act in 2017. And in the case of Amazon, it’s brought further scrutiny following the company’s recent high-profile reversal on creating a new regional office, or “HQ2,” in New York City.
The company faced fierce opposition over its arrival, partly because of nearly $3 billion in promised state and local tax breaks. Critics called the incentives a textbook example of corporate welfare.
Gardner says that Amazon’s federal income tax avoidance is “not at all surprising,” citing years of his organization’s research that shows how major corporations have used “legal tax breaks to sharply reduce” their income tax liabilities.
For example, the 258 Fortune 500 companies that reported profits in all years between 2008 and 2015 had an average federal effective tax rate of 21.2% over the eight-year period versus the 35% corporate tax rate at the time, according to an ITEP study. Meanwhile, 48 corporations had a tax rate of less than 10% over that period while 18 paid no federal income taxes at all.
For the record, Amazon’s effective federal income tax rate over the eight-year period was 10.8%.
Those sorts of figures have only been exacerbated by the Trump Administration’s tax overhaul, according to Gardner. The new tax law slashed the 35% corporate tax rate to 21% and expanded incentives such as accelerated depreciation, which lets companies immediately and fully expense the cost of new equipment and machinery rather than write them off over their useful life, as was previously the case.
For a company like Amazon, which continuously invests in its business by building new facilities and buying equipment, the new, super-charged accelerated depreciation deductions come in handy. According to Amazon’s own SEC filings, such expenses likely fall within the $419 million in income tax credits that the company disclosed for the 2018 fiscal year, which it says it is “utiliz[ing] to reduce our U.S. taxable income” and which allows the “full expensing of qualified property, primarily equipment, through 2022.”
This is where there is significant disagreement among the tax policy experts in D.C.’s think tanks. One the one hand, Gardner claims that companies like Amazon were “going to engage in widespread capital investment no matter what” tax incentives were available.
“For every occasion in which these [tax] breaks actually encourage more research, capital investment and job creation, there is another case in which it’s simply giving companies tax breaks for what they were going to do anyway,” he says. “Amazon was going to engage in widespread capital investment no matter what. They have to.”
But there are others who believe that such incentives are simply a case of good tax policy at work—that they’re functioning as intended, and encourage companies to reinvest profits to create jobs and stimulate growth.
Adam Michel, a senior policy analyst at conservative think tank The Heritage Foundation, describes the immediate expensing provision as “a good piece of tax policy that encourages [corporations] to reinvest in their businesses in the form of capital investments.” He calls it “flatly incorrect” that Amazon and others would reinvest their profits as much as they currently do without the aid of such incentives.
“If you lower the cost of making an investment, you can’t unanimously say that even a large, profitable company like Amazon won’t change their behavior,” Michel says. “All businesses make investment decisions based on sophisticated calculations. If you add in provisions like expensing, you will get more investment from both small and large businesses.”
That sentiment was echoed by Jared Walczak, a senior policy analyst at the independent Tax Foundation. “A company that is plowing most of their profits into new investments and expansion doesn’t have a lot of profits to tax,” according to Walczak. “This is the tax code working as intended; the company is doing what you generically want companies to do, which is to create more jobs, grow and invest.”
For years, Amazon burned through cash with the goal of growing its business at the expense of profitability. Having established itself as one of the largest companies in the world—and now a significantly profitable one at that—the Jeff Bezos-led giant is now benefiting from its scale as far as reaping the tax rewards of its sizable expenditures.
“The bigger you are and the more capital intensive you are, the bigger the benefit,” John Barrie, a partner at law firm Bryan Cave Leighton Paisner, says of the expense deduction provisions in Trump’s tax overhaul.
In addition to income tax credits, the other major line item (and by far the biggest) in Amazon’s SEC filings that explain its limited federal income tax liabilities are the more than $1 billion in deductions for stock-based employee compensation. These deductions pre-date the 2017 tax reform bill, as do Amazon’s roughly $1.4 billion in federal tax credit carryforwards (past incentives that it can claim in future years) that consist primarily of research and development tax credits and that are “available to offset future tax liabilities,” according to its SEC filings.
The company also has around $627 million in net operating loss carryforwards, which are losses from previous years that it can use to offset future taxes. Amazon says that as it uses up both the operating losses and tax credit carryforwards, “we expect cash paid for taxes to increase.”
And it also reports $565 million in deferred federal income taxes from last year that likely also helped reduce its 2018 bill—though the company will, presumably, have to pay those taxes at some point.
In a statement on the ITEP report, an Amazon spokesperson says the company “pays all the taxes we are required to pay in the U.S. and every country where we operate, including $2.6 billion in corporate tax and reporting $3.4 billion in tax expense over the last three years.” Amazon notes that its profits “remain modest” given the “highly competitive, low-margin” nature of its core retail business, and adds that it has “invested more than $160 billion in the U.S. since 2011” in scaling out its business.
Tax policy wonks on both sides of the ideological divide acknowledge that it would be unwise to read too much into any one year’s worth of financial reports in assessing a company’s tax burden. But while one side continues to point to the merits of a pro-growth corporate tax policy—“Corporations don’t ever pay any tax; the tax is always passed on, whether it’s to consumers or workers,” the Heritage Foundation’s Michel notes—those like Gardner suggest that there is years’ worth of evidence pointing to a system that is “more loophole than law,” as he put it.
“Nobody dreamed up these tax breaks with malicious intent; every break is in the code because somebody though it was a good idea,” Gardner says. “But on balance, the net effect of these objectives is a pernicious one.”