Amazon’s airborne fulfillment centers – Wacky Tax Wednesday

It’s not a bird or a plane. It’s an Amazon flying warehouse.

You’ve probably heard by now that Amazon was recently granted a patent for an airborne fulfillment center and its accompanying delivery drones. But have you considered how flying warehouses could impact sales tax?

What is an airborne fulfillment center?

The patent, which was granted in April but revealed to the public by CB Insight’s Zoe Leavitt in December, describes “an airborne fulfillment center (AFC) and the use of unmanned aerial vehicles (UAV) to deliver items from the AFC to users.”

This AFC would remain at a high altitude, approximately 45,000 feet, and be stocked by smaller airships that would carry people, fuel, products and supplies up, and people, overstock, and waste down. Drones would deliver goods from the airborne fulfillment center to customers down below. Due to their limited power and flying range, the drones would have to be transported back up to the AFC in a shuttle.

Potential benefits

Amazon already has fulfillment centers in at least 21 states. Amazon Prime members nationwide benefit from two-day shipping, and same-day delivery is available to Amazon Prime members in 29 cities. In a select few locations, it’s even possible for Prime members to have groceries and other items delivered in one to two hours.

But gratification could be even more immediate.

The patent states that an AFC could be positioned over metropolitan areas to “provide advertising, decrease the delivery time and/or to satisfy an expected demand (e.g., at a temporal event).” It could even deliver food, which could be prepared in the AFC and then sent directly to the consumer in a temperature-controlled container. AFCs and delivery drones could be used anywhere there is high demand — sporting events, concerts, and other gatherings. Imagine: diehard sports and music fans could refresh their refreshments without leaving their seats. Parched, sunburnt concertgoers at the remote Gorge Amphitheater in George, Washington could have cool drinks and sun hats dropped down to them; there’d be no need to stand in long lines for Lollapalooza swag.

Potential roadblocks

Of course, there’s a long road between obtaining the patent and actualizing the dream. While Amazon is on its way to overcoming technical hurdles (the company recently made a successful drone delivery in England), it will take time to surmount regulatory roadblocks. AFCs aside, the Federal Aviation Administration’s new drone rules prohibit flights “over unprotected people on the ground who aren’t directly participating in the UAS operation” (FAA). In other words, drones won’t be dropping down from an AFC to deliver drinks in a stadium full of Seahawks fans anytime soon.

Assuming technological and regulatory hurdles could be successfully overcome, there would likely be other challenges. Would stadiums allow spectators to purchase items from Amazon instead of their own vendors? Could they prevent it from happening?

Possible sales tax implications

Come March 1, 2017, Amazon will collect and remit tax in 35 states plus the District of Columbia. It has agreed to voluntarily collect tax in seven states from Alabama to Wyoming since last October. Amazon hasn’t commented on this new trend, other than to occasionally confirm that it would be collecting tax in such-and-such state, but something seems to be up at Amazon headquarters.

For years, the company has had a caveat built into its Associates Agreement that barred residents of certain states from participating in the program. Some states, like Minnesota, have come and gone from the list as their remote sales tax policies have changed. Louisiana was added on April 1, 2016, when its internet sales tax law took effect, and it was quietly removed on January 1, 2017, when Amazon began its voluntary collection of Louisiana tax. Soon another state will be removed from the list: Rhode Island. Amazon has announced that it will collect and remit tax on Rhode Island transactions beginning February 1, 2017.

The company hasn’t publicly addressed this issue, so its motives are purely speculative. Could it be that it sees itself eventually collecting sales or use tax in all states that have it, whether required to or not? Could it be that it imagines American skies full of flying fulfillment centers, catering to the needs and whims of consumers everywhere, and imposing a tax obligation on the company nationwide?

Today, the presence of a fulfillment center in a state triggers a tax obligation in that state. Would the presence of an airborne fulfillment center within (above) a state’s borders do the same? If so, would an AFC need to occupy a state’s airspace for a certain length of time before Amazon is required to collect and remit tax?  How high do state government rights extend?

The federal government takes the stance that “they alone regulate U.S. skies,” but numerous states, cities, and even towns have already passed laws restricting or banning the use of drones (WSJ), and they will surely have an opinion about any floating fulfillment center that darkens their skies. Sales and use tax laws are already being adapted to drones — the question of who controls the right to tax activities occurring in a flying fulfillment center is bound to come up.

It’s not unusual for companies to obtain patents for items that will never be realized. Yet if anyone has the grit and deep pockets required to put a fulfillment center above Seattle’s CenturyLink Field, I believe Jeff Bezos does. If it happens, and if I’m still here, I’ll let you know how sales tax comes into play.

Until then, keep abreast of actual sales and use tax changes by signing up for the Avalara Newsletter.

Amazon’s patent and some very cool drawings are available at the United States Patent and Trademark Office.