Amazon’s Hidden Ad Auction Tax Heads to Federal Court

The Federal Trade Commission and 22 states sued Amazon on Monday, saying a hidden surcharge on search ads took more than $20 billion from brands and sellers. The 181-page complaint, filed in Seattle, names about 1.2 million advertising customers. Amazon called the case misguided and said the average cost of a click did not rise.

The fight underneath those claims is simpler. Amazon’s own figures show winning bids fell by half as its ads got more relevant. The FTC says the company quietly kept the discount.

A Phantom Bidder Inside Amazon’s Ad Auction

The commission, in a 2-0 vote, sued Amazon over a secret ad surcharge in U.S. District Court for the Western District of Washington. 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 joined. Texas did not. It filed its own case the same day.

The products at issue are Sponsored Products, Sponsored Brands, and Display ads that sit next to search results on Amazon.com and the app. The complaint says Amazon has told advertisers since about 2012 that those slots are sold in a generalized second-price auction. In that format, the winner is supposed to pay just enough to beat the next bid, often described as one cent more, not the full amount they were willing to spend.

That promise is why people bid high. If you think you will only pay the runner-up’s price, you can name your true value and still sleep. The FTC says Amazon broke that bargain in late 2018, then rolled the change into Sponsored Products search in mid-2019, without telling the people writing the checks.

Internal papers quoted in the complaint call the replacement a “soft reserve.” After the auction ran, Amazon allegedly swapped the second-price result for a higher number it set itself. The senior vice president who runs Amazon Ads, speaking inside the company, described “a proxy 2nd price that we calculate,” not a price “set by an actual bidder.” Another document, the commission says, spoke of an “invented auction participant.”

Advertisers Paid Their Own Bid 80% of the Time

A second-price auction is supposed to leave a gap between your max bid and your bill. The FTC says that gap mostly closed. For Sponsored Products, the share of auctions in which the winner paid their own bid rose from 30% to 40% in 2021, to 70% in 2022, and to about 80 percent in 2024.

Amazon’s public training used a clean example. Bid $2.00, next bid $1.00, pay $1.01. California’s filing quotes a February 2024 video, “Sponsored Ads Proficiency Training,” in which a speaker says the charge “is the minimum required to beat the ad with the next highest ranked score.” The head of Amazon Ads gave a large customer the same $2.00 / $1.00 / $1.01 story when asked directly, according to the complaint.

THE PROMISE AND THE BILL

Amazon, in its reply, does not deny that reserve prices exist. It says a “hard reserve” is the floor to enter an auction and a “soft reserve” is its estimate of what a placement is worth. If your bid clears both, you pay the soft reserve, which is still below your max. If you clear the hard reserve but not the soft one, you still get the slot and pay your bid. “In no scenario does an advertiser pay more than their bid,” the company wrote.

That last sentence can be true and still leave the FTC’s point standing. Nobody claims Amazon billed people above the number they typed. The claim is that people typed high numbers because they thought a rival, not Amazon, would set the bill.

Small Sellers Cannot Leave the Search Page

The complaint counts about 1.2 million U.S. advertising customers, including more than 500,000 small and medium-sized businesses. They are not buying ads for fun. On Amazon, organic rank is crowded, and a sponsored slot is often how a listing gets seen at all.

WHO PAID THE EXTRA CLICKS

• The customer count: About 1.2 million U.S. advertisers bought Sponsored Products, Sponsored Brands, or Display placements.
• Small firms: More than 500,000 of them are small or medium-sized businesses, the FTC and the states say.
• Texas alone: More than 18,000 Texas sellers and vendors advertise on the site, Attorney General Ken Paxton’s office said.
• No second storefront: For most of those shops, Amazon search is the aisle, so skipping the auction means disappearing from the page.

Paxton’s release puts the money in payroll terms. Every extra dollar above the promised auction price, it said, is a dollar that did not go back into staff, stock, or growth. The FTC quotes an Amazon employee saying the hidden surcharges are “good for Amazon” because “advertisers must pay more for the same advertising,” and “the benefit to Amazon comes at the cost of advertisers.”

That is why a reserve on this particular page bites harder than a reserve on a banner network. You can leave a display exchange. You cannot leave the search results for the store that already has the shopper.

Amazon’s Defense Rests on a Flat Cost Per Click

Amazon’s August 31 blog post calls the suit “misguided” and aims at the harm theory, not the existence of reserves. From 2019 through 2024, it said, the average cost-per-click remained flat for Sponsored Products search ads after inflation. Conversion rates for those advertisers, it said, grew 24% from 2021 to 2025.

Winning bids, Amazon said, fell 50% from 2019 to 2025 on Sponsored Products search. In 2024, about 92% of selected Sponsored Products ads were not the highest bid, “often by a wide margin.” The mean winning bid, it said, is typically about the 128th bid by amount. Advertisers, in this telling, paid the same or less for clicks that sold more goods.

The company also offers a counter-number to the FTC’s $20 billion. Even if you accept the premise that advertisers do not change bids when the rules change, Amazon estimates they saved more than $8 billion from 2021 to 2025 because relevance, not raw bid, increasingly picked the winner. For 2026 it projects at least 58% higher sales and 46% better return on ad spend under that model than under a highest-bid ranking.

Amazon says it updated Ad Console in 2018 to state that a bid is a maximum, and that leftover training videos with older examples were “low-reach” and later pulled. It says the FTC reviewed about 1.5 million pages over six years and then leaned on “a handful of simplified communications.” It also notes that consumers appear only a handful of times in a complaint of more than 150 pages, with no data showing store prices went up.

Those points can sit next to the internal quotes without cancelling them. A falling bid and a flat CPC are what you would expect if relevance models let cheaper ads win, and a hidden floor is how a seller of the slot keeps the old yield anyway. Notes from a 2024 talk among senior executives, including the head of Amazon Ads and the company’s chief digital economist, called a “clever non-transparent way to charge first price” an “incredibly effective way to drive revenue,” according to the commission.

The $68 Billion Ads Engine This Case Hits

The complaint calls Amazon one of the world’s largest digital advertising companies and says it now takes in more than $68 billion a year from ads, mostly on its own store. Amazon’s earnings tables put 2025 advertising services at $68.6 billion. In July, Amazon said its ad business generated $19.8 billion in the second quarter, up 26% from a year earlier. Sponsored Products, CEO Andy Jassy said on the call, is still the largest offering.

AMAZON AD SALES BY QUARTER

A check Amazon can write is one kind of risk. A court order that changes how Sponsored Products is priced would hit a line that just grew 26% and already throws off more cash than many standalone ad companies. Shares fell about 3% in Monday afternoon trading.

The alleged extra charge is how the storefront sells scarce search slots, not a stray invoice error. Amazon itself describes the problem it was solving: as machine-learning relevance let lower bids win premium space, “premium placements in our Store were being undervalued.” The soft reserve, in the company’s words, was meant to reflect “what each placement is actually worth.” The FTC’s translation is that Amazon became the second bidder.

Did Higher Ad Costs Reach the Shopping Cart?

Chairman Andrew N. Ferguson did not treat this as a B2B billing spat. He tied the extra clicks to household prices.

When one of the world’s largest online retailers engages in unfair and deceptive conduct, the impact can be staggering. Amazon has millions of advertising customers who were misled into paying significantly higher prices. These higher costs were largely passed on to American consumers.

Andrew N. Ferguson, Chairman, Federal Trade Commission, August 31, 2026

The complaint is more specific. Sellers, it says, already pay fees to be on the platform. “A significant portion of these costs, including the advertising costs paid by Amazon sellers, are ultimately passed through to and paid by Amazon shoppers in the form of higher prices.” It also says Amazon’s scheme extracted over 20 billion dollars from advertising customers.

Amazon’s reply is that the complaint never shows a price increase on the shelf. “The FTC’s own complaint cites no evidence of consumer price increases,” the company wrote. It says the government’s damages model assumes no pass-through, and that any money the court might order would go to advertisers, not to shoppers. If ad costs were rising and being pushed into list prices, Amazon argues, the average click would have gotten more expensive. It says that did not happen.

WHERE THE TWO SIDES DISAGREE

• Ferguson and the states: Extra ad costs were “largely passed on” to shoppers, so the surcharge is a store tax as well as an advertiser tax.
• Amazon: Inflation-adjusted cost per click was flat, conversions rose, and the complaint offers no data that cart prices moved.
• The $20 billion itself: The FTC counts the gap between a true second price and what Amazon billed. Amazon counts a flat CPC and an $8 billion relevance saving and calls the harm theory a misunderstanding of how bidders actually behave.

Both stories can be partly right at once. If winning bids were falling 50% because relevance models let cheaper ads win, a company-set floor would harvest money that never shows up as a higher average CPC. Advertisers would pay more than the rival-set price and still see a flat invoice trend. Whether that money then moved into a bottle of vitamins is the fact neither side has put on the table in public.

Texas Sues on Its Own After the Prime Settlement

Paxton’s case is separate from the Seattle filing. It uses the Texas Deceptive Trade Practices Act and seeks civil penalties of up to $10,000 for each violation. Amazon, the release says, has run billions of auctions involving Texas advertisers. The state also wants a court order forcing Amazon to stop describing the auctions inaccurately and to give every Texas advertiser a record of each auction, showing the bids, any surcharge, and the final charge.

Paxton’s office put numbers on the surcharge that the federal complaint largely blacks out. Hidden reserves, it said, pushed the winner’s cost up by about 17% on ordinary days and by more than 25% during peak events such as Prime Day. In 2024 alone, it said, those surcharges generated roughly $4.5 billion in extra revenue for Amazon nationwide.

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, Attorney General of Texas, August 31, 2026

California Attorney General Rob Bonta, who is in the federal coalition, said Amazon “misrepresented how it calculates the cost of advertising on its platform” and “rigged billions of ad auctions.” The same offices have other live platform fights, including states seeking product changes from Meta over design features. The remedies in Seattle, Bonta’s office said, include an injunction, civil penalties, disgorgement, and restitution.

THE FTC-AMAZON CLOCK

1. About 2012: Amazon launches advertising auctions and, the complaint says, presents them as second-price.
2. Late 2018: Undisclosed “soft reserve” systems begin, according to the complaint, first outside the core Sponsored Products search product.
3. July 2019: Surcharges for Sponsored Products search placements begin, the complaint’s footnote says, based on Amazon’s internal files.
4. 2021 to 2024: The share of Sponsored Products auctions in which the winner pays their own bid rises from 30%-40% to about 80%, the FTC says.
5. September 25, 2025: Amazon agrees to pay $2.5 billion to settle a separate FTC Prime case, $1 billion as a civil penalty and $1.5 billion in consumer refunds of up to $51, covering about 35 million people. Amazon did not admit wrongdoing.
6. August 31, 2026: The FTC and 22 states file the ads case in Seattle. Texas files its own suit the same day.

The Prime deal and this complaint sit in the same courthouse and share a theme, a product described one way to the people paying for it and, prosecutors say, run another way. They are not the same case. Prime was about enrollment and cancellation. This one is about the meter on the search page that now supports a $68.6 billion ads line.

As of Tuesday morning, Amazon had not amended its blog post and the FTC had not added to the complaint. The concrete ask already on paper in Austin is an auction receipt. If Seattle ever orders the same thing, 1.2 million advertisers would see, click by click, whether the second price came from a rival or from Amazon.