Amazon’s Silent Ad Tax Now Faces a Federal Judge

The Federal Trade Commission and 22 states secret surcharge in its ad auctions on Monday, saying Amazon overrode its own search-ad auctions and took more than $20 billion from about 1.2 million advertisers. Chairman Andrew N. Ferguson said those higher ad bills were largely passed on to shoppers. Amazon called the suit misguided and said the complaint shows no consumer price increase.

The case, 2:26-cv-03097, landed in the U.S. District Court for the Western District of Washington. It is the bill for a 2019 pricing change that sellers have been eating in the search bar ever since.

Advertisers Paid Their Own Bid 80% of the Time

Amazon told brands for years that sponsored search ran as a generalized second-price auction. Win the slot, and you pay one cent more than the next bid, not the number you typed in. Bid $3.00 against a $1.00 runner-up, and the click should cost $1.01. That promise is why advertisers bid high. They thought the extra dollars were a ceiling, not the price.

The 181-page complaint filed in Seattle says that promise stopped matching the invoice. After the auction ranked the ads, Amazon replaced the second-price result with a higher figure it set itself. For Sponsored Products, the company’s largest ad line, winners were billed their own bid close to 80% of the time in 2024. The commission’s 2-0 vote to file treats that shift as a first-price sale sold under a second-price label.

HOW OFTEN THE WINNER PAID ITS OWN BID

Amazon still says no advertiser is charged above the maximum bid it authorized. The fight is not a charge past the ceiling. It is a charge that climbed up to the ceiling while the help pages still described a penny-over-the-runner-up sale.

The Soft Reserve and the Phantom Bidder

Internally, Amazon called the add-on a “soft reserve price.” A hard reserve is an ordinary floor: clear it or stay out. The soft reserve, the complaint says, was applied after the winner was already known. If genuine bids produced a low second price, Amazon swapped in a higher “proxy 2nd price that we calculate,” in the words of the senior vice president who ran Amazon Ads. Another internal file called the stand-in an “invented auction participant.”

Amazon has millions of advertising customers who were misled into paying significantly higher prices. These higher costs were largely passed on to American consumers. The FTC under President Trump won’t allow this deception to continue.

Andrew N. Ferguson, Chairman, Federal Trade Commission press release

The agency’s theory of harm runs past the ad account. Amazon sellers already pay fees to stay in the store. A 2022 study inside the company, cited in the complaint, found that a large share of buyers of its most lucrative placements were new or small businesses. Those shops sell groceries, clothes, school supplies, and pharmacy goods. When the click gets more expensive, the complaint says, a chunk of that cost shows up on the product page.

Teams that actually bid on Amazon at scale have been treating the auction like a first-price sale for some time. Click charges land on the typed bid more than half the time in some books of business, which is why shading the bid (the classic first-price move) is the tactic that matches the data. A first-price auction is a legal way to sell ads if the seller says that is the format. Amazon’s own DSP already runs that way. The Seattle case is about the label on Sponsored Products, Sponsored Brands, and Display, not about whether an auction may have a reserve.

Why Amazon Changed the Auction in 2019

Sponsored search auctions date to about 2012. The complaint says Amazon grew unhappy with the revenue those auctions produced by late 2018 and began writing its own second price. Sponsored Brands felt it first that year. Sponsored Products followed in 2019. Display was pulled in by 2023. Amazon’s public line is different. It says machine-learning relevance models, in wide use by 2019, let lower bids win more often, which left premium slots “undervalued,” so it tested soft reserves as a live estimate of what a placement was worth.

Staff notes quoted by the commission are blunter. Reserve prices were “good for Amazon because they don’t change the allocation” of ads “and advertisers must pay more for the same advertising.” A 2024 discussion among senior executives, including the head of Amazon Ads and the company’s chief digital economist, called the setup a “clever non-transparent way to charge first price” and “an incredibly effective way to drive revenue.” Another file said the surcharges reached prices “beyond what [can] be achieved through advertiser competition.”

THE CONCEALMENT CALENDAR

1. 2018: Amazon begins secret reserve pricing on Sponsored Brands and, it says, updates the Ad Console to state that a bid is the maximum charge.
2. 2019: The same surcharge spreads to Sponsored Products, the line that produces most sponsored-ad revenue.
3. 2023: Display ads are brought under reserve pricing.
4. 2024: Internal files put the own-bid billing share near 80%; staff write that revealing the surcharge would cause “irrevocable damage to advertiser trust” and a “downward spiral” of lower bids.
5. October 30, 2025: Amazon adds a first public mention of reserve pricing to one Support Center page, almost a year after learning of the FTC inquiry.
6. April 15, 2026: High-volume sellers in the Million Dollar Sellers group pause ads for 24 hours over cash-extraction rules.
7. August 31, 2026: The FTC and 22 states file in Seattle; Texas files its own case the same day.

Amazon’s current help pages describe an auction-based bidding model for sponsored ads and tell advertisers the bid is a maximum. The commission says even the later reserve-price language still fails to spell out the nature, scope, and extent of the systems in place since 2018. Amazon says leftover training clips with older examples were low-reach material that it pulled or rewrote when it found them, and that the FTC cherry-picked those clips from about 1.5 million pages spanning six years.

The Invoice Landed on Half a Million Small Sellers

The coalition’s customer count is not a handful of global brands. More than 500,000 of the 1.2 million U.S. advertising customers are small and medium-size businesses. They bid in the dark. Amazon does not give them the competing bids or a line-by-line account of how a click was priced, which is the record Texas is now asking a court to force into the open.

WHO IS ON THE HOOK

• Small shops: Over 500,000 small and medium-size businesses bought the sponsored placements named in the suit.
• Texas sellers: More than 18,000 Texas sellers and vendors advertise on the store, across billions of auctions, Attorney General Ken Paxton’s office said.
• The boycott cohort: On April 15, 2026, members of Million Dollar Sellers halted ads for 24 hours after Amazon moved to pull ad costs from disbursements and added a 3.5% fuel surcharge.

Eugene Khayman, co-founder of that seller group, put the mood in one line: “this is no longer just about irritation. It is about cash extraction.” The boycott was aimed at billing and logistics rules, not the soft reserve. It still shows how ad spend had become another draw on working capital months before Ferguson put a dollar figure on the auction. Amazon’s ads business took in more than $68 billion over the latest full year in the complaint, and it reported $19.8 billion in advertising services for the second quarter of 2026, up 26%. Sponsored Products remains the largest offering.

Amazon Says the Click Price Never Rose

Amazon’s rebuttal does not spend many words denying that reserves exist. It spends them on harm. From 2019 through 2024, it says, the average cost per click stayed flat once inflation is stripped out, while conversion rates for individual Sponsored Products advertisers rose 24% from 2021 through 2025. Average winning bids on those search ads fell 50% from 2019 to 2025. In 2024, about 92% of selected Sponsored Products ads were not the highest bid, and the mean winning bid sat around the 128th bid by amount, because ranking now mixes relevance with price.

AMAZON’S COUNTER ON PRICE AND PERFORMANCE

• Click price: Average cost per click on Sponsored Products search ads was flat from 2019 through 2024, adjusted for inflation, Amazon said.
• Bid level: Average winning bids on those ads fell 50% from 2019 to 2025.
• Relevance ranking: About 92% of selected Sponsored Products ads in 2024 were not the highest bid.
• Claimed savings: Amazon estimates advertisers saved over $8 billion from 2021 to 2025 because ranking is not bid-only.

On a winning bid that clears both reserves, Amazon says the advertiser pays the soft reserve, which is still below the typed maximum. If the bid clears the hard reserve but not the soft one, the company still runs the ad and charges the bid. “In no scenario does an advertiser pay more than their bid.” It also says shoppers saved over $230 a year on average last year through deals, coupons, and Subscribe and Save, and that the complaint mentions consumers only a handful of times. The damages model, Amazon argues, assumes no pass-through and would send redress to advertisers, not to shoppers.

The FTC wants the public to believe this case is about higher prices for consumers. It is not.

Amazon, company response to the Sponsored Ads lawsuit, August 31, 2026

Advertisers, the company says, do not bid off help-page copy. They bid off sales. If the click gets worse, they cut the bid. If that loop holds, a hidden reserve cannot pile up $20 billion in quiet overcharges, because the bid would have moved. That is the cleanest version of Amazon’s case, and it is why the consumer-price claim is the one it is most eager to kill.

Texas Wants a Receipt for Every Auction

Texas did not join the 22-state complaint. Attorney General Ken Paxton filed a separate action the same day under the Texas Deceptive Trade Practices Act. His office says the hidden add-on pushed the winner’s cost up by roughly 17% on ordinary shopping days and more than 25% during peak events such as Prime Day, and that the surcharges produced roughly $4.5 billion in additional revenue for Amazon nationwide in 2024 alone. Civil penalties can run up to $10,000 per violation. Amazon has run billions of auctions involving Texas advertisers.

Amazon lied to Texas small businesses and charged them for an auction it never ran, which raises prices for job creators and Texas families.

Ken Paxton, Texas Attorney General, August 31, 2026 statement

The Texas ask is more concrete than a fine. Paxton wants Amazon to stop describing the auctions as second-price sales and to give every Texas advertiser a record of each auction: the bids, any surcharge, and the final charge. That receipt is the piece advertisers have never had, and it is the piece that would let a seller test Amazon’s claim that the extra money was only a fair reserve.

The Relief the Coalition Wants in Seattle

The federal complaint seeks a permanent injunction, civil penalties, restitution, disgorgement, and other money relief. It does not name a damages number beyond the “over 20 billion dollars” estimate built from Amazon’s own files on hidden surcharges. The 22 states are Alaska, Arizona, California, Colorado, Florida, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Nebraska, New Jersey, New York, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Vermont, and Washington. The commission vote was 2-0.

WHAT WE KNOW

• The filing: Case 2:26-cv-03097 is pending in Seattle; Texas is proceeding on its own complaint.
• The products: Sponsored Products, Sponsored Brands, and Display ads sold next to Amazon search results are in the dock.
• The mechanics Amazon admits: Hard and soft reserves exist, ranking uses relevance, and the charged price never exceeds the authorized bid.

WHAT IS UNCONFIRMED

• Pass-through: The complaint alleges shoppers paid more; Amazon says that claim has no data behind it.
• The $20 billion math: The figure is the plaintiffs’ reading of internal surcharge files, not a figure Amazon has accepted.
• How a court will treat reserves: Whether a disclosed maximum bid is enough warning, or whether the second-price pitch had to match the code, is still for a judge.

Amazon says it looks forward to making its case in court. Until that record is public, the second-price story and the first-price invoice remain the same unresolved pair that sellers have been bidding into for seven years.

Disclaimer: This article is news reporting on a filed lawsuit and related public statements. It is informational only and is not legal, investment, or business advice. It does not tell advertisers, sellers, or shoppers whether to change bids, prices, or legal strategy, and it does not predict how a court will rule. Readers who need advice on advertising contracts, seller accounts, or litigation should consult a qualified attorney licensed in the relevant jurisdiction. Figures, case status, and company claims reflect the public sources available as of September 2, 2026, and may change as the Seattle and Texas cases move.