Does Amazon Really Pay No Taxes? Here’s the Complicated Answer

Democratic presidential candidates have seized on reports that Amazon.com Inc. paid no 2018 federal taxes as they press for changes in the tax system.
A closer look at the internet giant’s tax disclosures over several years paints a more complicated picture: Amazon has paid income taxes somewhere, albeit at a low rate, likely helped by deductions and incentives related to investment, research and employee compensation.

Earlier this week, former Vice President Joe Biden spotlighted the company’s tax payments during a campaign stop in Iowa, this week, saying it should at least pay some taxes. He tweeted Thursday: “No company pulling in billions of dollars of profits should pay a lower tax rate than firefighters and teachers.”
Amazon tweeted back: “We pay every penny we owe. Congress designed tax laws to encourage companies to reinvest in the American economy. We have. ... Assume VP Biden’s complaint is w/ the tax code, not Amazon.”
Sen. Elizabeth Warren (D., Mass.) cited Amazon as she proposed a new corporate tax that would have cost the company nearly $700 million in 2018.
Here are some questions and answers exploring the company’s tax situation.

Did Amazon really pay no taxes for 2018?
We can’t know. Amazon’s tax returns are private, and its financial statements disclose costs in terms designed for shareholders, not policy makers: It includes accounting measures of taxes, which differ from tax-return calculations.

Why do people say Amazon didn’t pay taxes?
By one measure-comparing pretax U.S. profit and the company’s “current provision” for U.S. income taxes-Amazon earned $11 billion and had a tax bill of negative $129 million in 2018, essentially getting a net benefit from the tax system.

But the current provision isn’t the same as the bottom line of Amazon’s 2018 tax return. Instead, the current provision is an accounting measure of the company’s near-term tax cost. It is an estimate of the 2018 tax bill plus settlements of past disputes, changes to past projections and updates to reflect new regulations and laws. Amazon’s total effective tax rate for 2018 was 11%, including that current provision but also adding in foreign, state and deferred taxes.

“I’ll cheerfully acknowledge that [the current provision] is not what we want to really know, but it’s also the closest thing we’re ever going to see,” said Matt Gardner, senior fellow at the Institute on Taxation and Economic Policy, the left-leaning group whose report on Amazon and other companies drew Democrats’ attention.

So is Amazon getting a $129 million refund?
Not necessarily. There are indications Amazon paid little or no federal income taxes for 2018. Its federal net operating loss carryforwards-accumulated losses that offset future taxable income-rose to $627 million at the end of 2018 from $226 million a year earlier, according to securities filings. Its federal tax credit carryforward-accumulated credits that offset future taxes-rose to $1.4 billion from $855 million, largely because of the research-and-development credit. Those are signals that Amazon accumulated losses and tax credits faster than it generated income and tax liability. The law lets carryforwards smooth tax payments across business cycles and a company’s lifespan.

“Because we are in a low-margin industry and invest in innovation and infrastructure, we don’t make as much pretax profit as other tech companies, so our taxes are lower,” Amazon said in a statement.

So that means Amazon didn’t spend any money on income taxes in 2018?
No. Even though Amazon’s “current provision” number for 2018 was negative for federal taxes, Amazon said it made income-tax payments totaling $1.2 billion during that year, more than from 2011 through 2016 combined. The company doesn’t disclose how that payment was split among tax years or jurisdictions-such as the U.S., states and foreign countries. So, the $1.2 billion could include California income taxes for 2016 or U.K. payments for 2017.

What’s the right way to determine what Amazon actually pays?
There’s no right way, and each year is a snapshot. Longer views can help. From 2012 through 2018, Amazon reported $25.4 billion in pretax U.S. income and current federal tax provisions totaling $1.9 billion. That is an 8% tax rate-low, but not zero or negative. Looking back further, since 2002, Amazon has earned $27.7 billion in global pretax profits and paid $3.6 billion in global cash income taxes, a 13% tax rate.

That is still a pretty low rate. Why is that?
Let’s start with investing. Amazon said it has spent more than $160 billion since 2011 on investments, including its distribution network, cloud-computing centers and wind and solar farms.

When a company buys depreciable property-such as warehouse equipment-it treats the costs differently for tax and financial purposes.
For the financial statement, the company records expenses over the asset’s useful life, not subtracting from current profits. For tax purposes, companies can now deduct the full amount immediately for many capital expenses, reducing upfront taxable income and thus taxes.

What else is lowering Amazon’s tax rate?
When companies give employees restricted stock grants, companies take an expense for financial statement purposes, based on estimated value. The tax deduction isn’t set until compensation vests and employees can take it-and pay personal income taxes on it. 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.

What are the policy implications?
Democrats use Amazon to argue that companies should pay more. Sen. Warren has a plan to tax profitable companies on their financial-statement income, on top of the current system. Although Amazon has tangled with the Internal Revenue Service over cross-border tax maneuvers, the politicians aren’t accusing the company of doing anything illegal-just offering an example of what they argue should change in the tax law. But the current corporate tax system was designed by Congress to encourage investment and research and let companies realize the benefit of early losses when they become profitable. Changing that could undermine those aims.
By Richard Rubin