“Your brand is what people say when you’re not in the room.”
This (probably fictional) quote from Jeff Bezos seems particularly apt right now, as the Amazon.com Inc. founder’s statements about his company and its brand are being used as weapons in a legal fight over billions of dollars in potential taxes—in a courtroom where Bezos was never summoned to speak.
Last November, this blog took a look at one of the biggest cases working its way through the U.S. Tax Court today—a battle between the Internal Revenue Service and Amazon over the online retail giant’s European cost sharing arrangement. The case could, if decided against Amazon, cost the company as much as $1.5 billion.
One of the key points of the case is the value of Amazon’s branding—its naming rights, logo, site design and other aspects associated with the user experience and public image—which the U.S. parent company sold to a Luxembourg subsidiary for use in Europe. The IRS claims the price of the intercompany transaction was much too small, resulting in inappropriate profit shifting from the high U.S. tax rates to the very low rates in the small European nation.
The case put Amazon in the position of downplaying the value of its famous brand, claiming it’s mainly through innovation and superior service that Amazon has retained its dominance, not brand loyalty. This would seem to contradict industry observers—including a YouGov study which named Amazon the most highly regarded brand in the tech field, as well as Forbes Magazine, which ranked the company as the 24th brand in the world. And perhaps Bezos himself, who told Inc. magazine in 1997 that “a lot of it comes down to brand value” when competing online with companies that can copy your business model.
Since November, the case has taken some interesting turns. As it turns out, we hadn’t heard the last from Bezos on the subject of brands.
On Dec. 18, an expert witness for the IRS, University of Virginia Professor Ronald Wilcox, used the Inc. interview—as well as a 1997 Nightly Business Review video and a 2004 interview Bezos with Businessweek (now Bloomberg Business)—to support his testimony that Amazon’s brand was, indeed, valuable.
It’s not clear what portion of the Businessweek interview the IRS used to bolster its case. (That portion of the trial was closed to the public.) In the interview, Bezos claims that word-of-mouth from satisfied customers—not traditional advertising, which Amazon generally avoids—is the key to the company’s successful brand.
“You earn reputation by trying to do hard things well. People notice that over time. I don't think there are any shortcuts,” Bezos said.
As it turns out, the IRS wasn’t the only side researching past Bezos statements.
To challenge Wilcox’s testimony, Amazon tried to have another interview, with Playboy magazine in 2000, entered into evidence. (The link goes to the author’s website, not the adult magazine.) Since his Inc. interview, Bezos had seen his company explode onto the global commerce scene, and was TIME Magazine’s 1999 “Person of the Year.” He also changed—or at least clarified—his opinion on brands, claiming companies that rely on them are “insane,” and that online sellers “live or die based on the customer experience,” not brand loyalty.
“It is one of those paradoxes,” Bezos said. “Our customers are loyal to us right up until the second that somebody else offers them better service.”
(Interesting side note: According to Sheff’s article, as Bezos grew up he actually branded cattle working on his grandfather’s ranch in Cotulla, Texas.)
The IRS, which had unsuccessfully called Bezos to testify in the trial, objected to the inclusion of the Playboy interview as evidence, claiming it was hearsay. The court ruled in Amazon’s favor, but is now reconsidering arguments.
The impasse has led to a bizarre situation in which competing statements Bezos has made during his 20-year tenure as Amazon’s CEO are being trotted out by both sides in the hopes of swaying the judge, who will ultimately decide just how much should have been paid in this transaction.
(I am hugely indebted to reporting by Dolores Gregory and Paul Shukovsky, whose excellent coverage of the trial can be accessed through the link available at the end of this post.)
Of course, there’s a potentially limitless reservoir of Bezos statements on the value of his company’s brand, which could be cherry-picked by either side.
In “The Everything Store,” author and Bloomberg Business reporter Brad Stone obtained an internal company memo from Bezos entitled “Amazon.love,” in which he described a divide between loved and unloved companies, which he argued often came down to perceived “coolness.” Bezos felt companies like Apple and Nike are beloved by their customers and perceived as “cool,” while Microsoft and ExxonMobile—while very successful—are perceived as “uncool.” Bezos made it clear he was talking about perception, not reality, and seemed to fear that Amazon might be in danger of falling into the “uncool” category.
Bezos outlined several principles he believed separated the cool companies from the uncool ones—“risk taking is cool,” “hypocrisy is not cool,” “explorers are cool,” “conquerors are not cool.”
In 2015, Fast Company magazine speculated that the desire to be a “cool” company led Amazon to launch its Fire Phone, with mixed results.
What does all of this mean? Well, nothing, perhaps. It’s not surprising that Bezos has apparently changed some of his opinions on this issue as his company has grown into a behemoth, and as the Internet has evolved from a curiosity to an inescapable part of life. And his opinion, whatever it is, could well be irrelevant—the tax court is supposed to come up with its own valuation of Amazon’s brand.
But this case seems to symbolize a lot of the current global frustrations with the international corporate taxation system, and how it has not kept pace with the online world. Billions of dollars of taxable income hang in the balance as lawyers and judges attempt to peg the value of a uniquely digital asset with no appropriate comparisons—and that may not even exist.
Access even more in-depth analysis and expertise with a free trial to the Premier International Tax Library.
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