Amazon A History and Evolution of Business & Technology September 2008

1. Amazon.comA History and Evolution of Business & TechnologySeptember 2008 Rich Prem V.P. of Indirect Taxes/Tax Reporting Amazon.com richprem@amazon.com (206) 266-2708 Emmett O’Keefe Director, U.S. Public Policy Amazon.com eokeefe@amazon.com (202) 347-7390 1

2. In The Beginning…

3. There was a Man…

4. a few books…

5. and a concrete floor.

6. On July 5, 1994 that man incorporated Cadabra, Inc. Cadaver, Inc.??? New Name! Amazon.com, Inc.

7. We have grown fast 1994 Incorporated July 5, 1994 - Originally named Cadabra, Inc. 1995: 11 employees Website launches mid-1995 First warehouse opens (7,000 sq feet) 1997: IPO completed 1 millionth customer 2008: More than 70 million customers 7

8. Our website has changed a lot over time Now Then (‘95) 8

9. Outline Amazon.com: an e-commerce technology provider and a retailer The online retail market Amazon Services Biggest challenges to sales tax collection Conclusion & suggestions

10. Amazon.com’s Mission “Earth’s most customer-centric company, where you can find, discover, and buy anything online.”

11. Overview of Amazon’s Businesses Amazon’s Service Business consists of the following programs: Merchants@ and Marketplace WebStore by Amazon Fulfillment by Amazon Amazon Payments Amazon online retail business Amazon is the seller of record for a broad range of new products, including electronics, computers, kitchen and house wares, books, music, DVDs, videos, cameras and photo items, software, computer and video games, cell phones, tools and hardware and outdoor living items.

12. Amazon Services – Leveraging Technology Investments(www.amazonservices.com) 12

13. Amazon Services – Leveraging Technology Investments(www.amazonservices.com) 13

14. Overview of Amazon’s Third-Party Seller Programs Amazon’s Merchants@ and Marketplace Allows other businesses and individuals to offer their new, used and collectible products for sale on Amazon’s web sites. Their products are fully integrated on Amazon’s web sites and are purchased by customers through a single checkout process. Amazon is not the seller of record in these transactions. Amazon is not responsible for fulfilling orders placed by the customer using the Merchants@ programs. Amazon earns fixed fees, variable fees, per-unit activity fees or some combination thereof for the services that it provides to the third parties. Sellers who participate in the Merchants@ program are businesses, generally medium or large retail sellers. Sellers who participate in Amazon’s Marketplace program may be business entities or individuals, and some make only occasional, one-off sales, while others make regular sales out of their own inventory. Amazon Marketplace is available on www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.ca, and www.amazon.co.jp.

15. Outline Amazon.com: an e-commerce technology provider and a retailer The online retail market Amazon Services Biggest challenges to sales tax collection Conclusion & suggestions

16. The Fragmented State of the Online Sales Environment Highly Fragmented, a multitude of products being sold and business models used Millions of small sellers Thousands of search engines Hundreds of marketplaces beyond "Amazon," "Craigslist" and “eBay” Hundreds of online shopping carts and payment tools Huge opportunity for small sellers to benefit from service providers’ economy of scale

17. Online Sales Dominated by Multi-channel and Small Sellers A significant portion of the Top 500 retailers are multi-channel. Retail chain – nearly 40 percent Consumer brand manufacturers – 14 percent Catalogue/call center – 15 percent Web only sellers - just over 30 percent The current online market is largely comprised of two groups of sellers: multi-channel retailers collecting sales tax in most states and a large group of small retailers with limited nexus.

18. Millions more small sellers than originally thought. Three Ranges of Seller Size Top 500 (Region I) Next 28,128 medium-sized Internet retailers (Region II) with revenues between $1 million and $10 million dollars, and accounting for $29.9 billion in annual sales. At least 5 million small sellers (a conservative number, defined as those too small to measure activities at a unique web site) collectively accounting for $65.4 billion in 2004 annual sales (Region III). The Long Tail is Longer than You Think: The Surprisingly Large Extent of Online Sales by Small Volume Sellers.”(2008) Source, University of Maryland Smith School of Business

19. Amazon Sees Opportunity in the Tail • Amazon Services represents a significant investment in technology to help small sellers succeed online. • Technology diminishes the importance of scale as small sellers compete on the basis of things such as the scope of products offered and service.

20. Technology Allows Small Sellers to Use Ever-More Sophisticated Tools • Manage your inventory • Automatically list and re-list items • Automatically send feedback • Monthly profit and loss reporting • Free Listing Designer • Print shipping labels and invoices in bulk • Calculate shipping and taxes – “it just takes a few minutes to set up shipping costs, sales tax, or value-added tax.” (Source: www.paypal.com).

21. Shopping Carts: One Example of the Robust Market for E-commerce Services

22. Outline Amazon.com: an e-commerce technology provider and a retailer The online retail market Amazon Services Biggest challenges to sales tax collection Conclusion & suggestions

23. Amazon Services’ Seller Tools

24. How to Sell on Amazon #1

25. How to Sell on Amazon #2

26. How to Open Your Own WebStore

27. Let Amazon Handle Shipping: Fulfillment by Amazon

28. Payment Services: Checkout by Amazon #1

29. Payment Services: Checkout by Amazon #2

30. Overview of Amazon’s Tax Services Offering Amazon's tax calculation engine ("tax engine") has been implemented to provide the functionality necessary to calculate US sales and use taxes for all fifty states (plus the District of Columbia) and thousands of related local tax jurisdictions. Number of tax enabled merchants selling on Amazon.com: over 2,500, most are multi-channel retailers. Adoption has been slow amongst sellers with limited nexus. The tax engine does not support the calculation of federal, state, or local product-based excise or similar gross receipt taxes (e.g., NJ special fur clothing tax). However, it does support the calculation of some taxes labeled as "excise" or "gross receipt" taxes, but that are commonly acknowledged as sales and use taxes (e.g., NM and HI). The tax calculation results generated by the tax engine are not only dependent on the tax rules submitted by the seller and the logic built into the third-party rate engine software, but also dependent on the accompanying methodology used by Amazon to calculate such taxes. For instance, the third-party software does not decide how order-level promotions are allocated to the individual items in an order; Amazon's methodology does.

31. Survey of Checkout Options and Features

32. Outline Amazon.com: an e-commerce technology provider and a retailer The online retail market Amazon Services Biggest challenges to sales tax collection Conclusion & suggestions

33. Based on Our Experience Offering Tax Services • The cost and complexity is in the exceptions: • Tax Exempt Sales and Sales Tax Holidays • Customer Returns & Adjustments and Restocking Fees • Shipping and Handling Fees • Product Taxability Coding (See appendix for more detail)

34. The Joint Cost of Collection Study

35. Outline Amazon.com: an e-commerce technology provider and a retailer The online retail market Amazon Services Biggest challenges to sales tax collection Conclusion & suggestions

36. Conclusion • There is growth in the long tail of small sellers. • Technological and market forces will compete to help small sellers if sales tax collection is required. • The Governing Board should encourage that process with additional simplifications to streamline collection.

37. Amazon’s Suggestions • Further streamline transactions involving “exceptions” which represent nearly 60 percent of collection cost for small sellers. • - Consider a blended rate for small sellers • Provide additional vendor comp for small sellers • The Gov. Board should take actions to encourage the private market to develop technologies and tools to help small sellers. Setting a small seller exemption too high will only largely eliminate any incentive for developers of these services. • Actions the Gov. Board should take: • - Centralize and standardize the states’ rates and taxability databases. • - Follow the model of member states and establish an IT office to liaison with developers and small sellers and encourage the development of tools for small sellers. • - Establish standards for private certification of automated tax collection software.

38. Amazon’s Estimate of Lost Revenue Relative to Size of Business Exempted

39. 2008 Annual Meeting of Stockholders

40. Questions? ?

41. Appendix

42. Sales Tax Holidays Tax Calculation requires date -- date is used by the external engine to determine applicable rates and rules. Remote sellers generally charge tax at shipment using shipment date rules. Without customization, items may be ordered during a tax holiday and quoted no tax, only to have the item shipped outside the holiday and charged tax. No Holiday (8/7/XX) 12:00? Holiday (8/14 - 8/17/XX) 12:00? No Holiday (8/18/XX) Not Ordered But Shipped Ordered But Not Shipped Order (quote) 8/7/XX Backpack $50.00 Tax $ 4.00 Total $54.00 Shipment (sale) 8/16/XX Backpack $50.00 Tax $ 0.00 Total $50.00 WINNER!!! Order (quote) 8/16/XX Backpack $50.00 Tax $ 0.00 Total $50.00 Shipment (sale) 8/21/XX Backpack $50.00 Tax $ 4.00 Total $54.00 LOSER…

43. States need to take uniform approach on the treatment of returns. Retention of shipping & handling charges and imposition of restocking fees California shipping and handling charges Time limits Connecticut (90 days of purchase) Returns and Restocking

44. States need to take uniform approach to the taxation of shipping & handling charges. Too many variations Profit elements (“winners” versus “losers”) Separately stated Allocation methodologies (mixed taxability) Type of carrier Title passage Caps and thresholds Clothing (state differences, and general v. tax holidays) Explainable and understandable to customers Mail order catalog order form test Shipping & Handling Fees