Wanted: A Tax Code for the Digital Age

Anyone who wants a Nintendo Wii console or the latest John Grisham novel can pick it up at the nearest Target (TGT) store or log on to Amazon.com (AMZN) and have it delivered. The similarities between the two retailers aren't as apparent when it comes to taxes. Amazon's effective rate—the total it pays in federal, state, local, and international income taxes after deductions, along with its sales and property levies—has been more than 10 percentage points lower than Target's for the past four years. Target's effective tax rate in 2010 was 35.1 percent, compared with Amazon's 23.5 percent. Amazon in 2010 owed $352 million in income taxes worldwide on income of $1.5 billion, according to its SEC filings, while Target owed $1.58 billion on income of $4.5 billion. Amazon, the world's largest online retailer, has successfully resisted efforts from politicians to make it collect state and local taxes that brick-and-mortar rivals must charge. Tax laws "absolutely" put Target at a disadvantage, says Brian Sozzi, an analyst with Wall Street Strategies in New York. "It's one of the reasons why Amazon has been so successful."

These companies represent just one example of how the U.S. corporate tax code favors global companies over domestic ones, high-tech businesses over old-line manufacturers, and drugmakers over oil companies. The U.S. federal corporate tax rate of 35 percent is the highest in the developed world. Still, the Treasury Dept. says the federal government bleeds $1.2 trillion a decade as battalions of lobbyists, accountants, and lawyers create and promote more ways to avoid taxes.