Legal tools help Amazon cut tax liability
Candidates vying for the Democratic presidential nomination are making such an example of Amazon during campaign stops that the mega-company is the subject of a now-popular calland-response refrain.
“How much did Amazon pay in federal taxes last year?” Andrew Yang, who recently dropped out of the race, asked supporters at a community college in Muscatine, Iowa, in January. “Zero,” the audience replied. “Zero — that is your math,” Yang, a businessman, said.
Sen. Elizabeth Warren in January had a related Amazon question for her Iowa supporters: “Anybody remember how much they paid in taxes?” “Zero,” the crowd shouted back. Both Yang and Warren made similar remarks in New Hampshire as they rallied their supporters about a week before the state’s Feb. 11 primary.
Is it true that despite making billions of dollars, Amazon pays zero dollars in federal income tax?
Short answer: Amazon’s tax returns are private, so we don’t know for sure what Amazon pays in federal taxes. But Amazon’s estimates on its annual 10-K filings with the U.S. Securities and Exchange Commission are the closest information we have on this matter. They show mixed results for the past three years: no federal income tax payments for 2017 and 2018, but yes on payments for 2019.
“Amazon is off the hook in the narrow sense that you can no longer assert they are not paying federal income tax now,” said Matthew Gardner, a senior fellow at the Institute on Taxation and Economic Policy. Still, Amazon’s financials indicate that in 2019, its effective tax rate was 1.2%, far below the 21% statutory corporate tax rate, he said.
Here’s a more nuanced picture of Amazon’s taxes.
A glance at Amazon’s 10-K report
A 10-K statement provides a financial overview of a company based on its expectations, estimates and projections.
Amazon’s latest filing says the company’s U.S. income before taxes in 2017, 2018 and 2019 were, respectively, $5.6 billion, about $11.2 billion and close to $13.3 billion.
Amazon estimated a federal income tax bill of negative $137 million in 2017 and negative $129 million in 2018. That could be read as Amazon expecting refunds for those amounts and not paying federal taxes those years, Gardner said.
For 2019, Amazon estimated owing $162 million in income tax to the U.S. government.
Amazon’s regulatory filing also says that the company paid $957 million, $1.2 billion and $881 million in taxes worldwide in 2017, 2018 and 2019, respectively. But the filing does not identify to which governments that money was paid. It also doesn’t say whether the entirety of the amount paid in a given year was for tax owed that specific year (for instance, it could be that money owed from previous years was paid in 2017).
From 2017 through 2019, Amazon estimated paying a total $809 million in U.S. state taxes and a total $2.4 billion in international taxes.
“We follow all applicable federal and state tax laws, and our U.S. taxes are a reflection of our continued investments, compensation of our employees, and the current tax rules,” Amazon said in a Jan. 31 blog post.
In its blog post, Amazon said its 2019 U.S. taxes included “over $1 billion in federal income tax expense.” That $1 billion figure represents the company’s tax obligation for 2019, but doesn’t mean it’s paid that entire amount; it includes a $914 million tax liability that it is deferring, or expecting to pay in future years.
How did Amazon get a negative tax liability in 2017 and 2018?
Stock-based compensation and tax credits help Amazon reduce its taxable income, experts told PolitiFact in 2018 for a related fact-check.
Companies issue stocks as a form of compensation to employees. And stocks are a common incentive for executives to make more money for the company. When stocks are offered as compensation, they count as a cost, which in turn reduces the company’s taxable income.
Companies in their annual reports aren’t required to specify which tax credits they claim, but experts say Amazon likely uses tax write-offs for research and development, domestic production and equipment depreciation.
Net operating losses and tax credit carryforwards may create a negative tax liability, said Garrett Watson, an expert on federal and state taxes at the nonprofit Tax Foundation.
“What this means is Amazon may use the losses and credits in a future tax year to offset future positive tax liability,” Watson said. “This does not mean that Amazon would be getting a refund like an individual may if they remit more in tax than they owe.”
The Institute on Taxation and Economic Policy in a December report estimated that 91 companies that collectively made $106 billion in profit in 2018 paid no federal taxes on their income. That list included Amazon.
There is no implication that Amazon has done anything illegal, tax experts say.
Amazon also says it adheres to a tax code written by Congress “that incentivizes the type of job creation, capital investment, development of technology, and employee ownership that Amazon does because these are critical drivers of a prosperous economy.”
The tools that Amazon uses to reduce its federal income tax liability, Gardner said, “are 100% legal, ratified and approved by Congress.”