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Originally published January 23, 2011 at 6:01 PM | Page modified January 24, 2011 at 6:59 AM

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Amazon.com fights sales taxes after getting other breaks

Amazon.com promised that a new distribution hub would bring 1,400 jobs to Tennessee, so state and local officials offered a package of economic incentives. But Amazon wants more, arguing it should not have to collect sales taxes from its Tennessee customers.

Seattle Times business reporter

To persuade Amazon.com to build a distribution hub in Tennessee, state and local officials offered a package of economic incentives that included free land, job-training assistance and more than $12 million in property-tax breaks.

It was a run-of-the-mill package for an out-of-state company promising to create some 1,400 jobs at two new warehouses by the end of 2011.

But Amazon sought more from the Volunteer State. Amazon policy chief Fred Kiga made a case for why the Seattle-based company should not have to collect sales tax from Tennessee customers once the warehouses are up and running.

At stake was Amazon's ability to continue offering Tennessee customers everything from books to bikes without making them pay sales tax — a significant price advantage over the local brick-and-mortar stores.

Whether Amazon should be able to give customers a sales-tax break has been a hot-button issue since the early days of online shopping and is especially contentious now that states are struggling to close big budget holes after the Great Recession.

Under a 1992 Supreme Court ruling, a state cannot require Internet retailers to charge sales tax on its behalf unless they have a physical presence in that state. What constitutes a physical presence is more complex than you might believe.

Amazon so far has avoided collecting sales tax in six states where it operates distribution centers. The company argues that, because the facilities are separate legal entities, they do not give the e-tailer a physical presence.

"We are having discussions right now with the state on this," Kiga, a former head of Washington's revenue department, told the Times Free Press in Chattanooga last month. "The distribution centers here are not retailers, but rather drop-shippers."

Officials for Tennessee's revenue and economic-development departments declined to comment, citing a long-standing policy of not divulging tax information about a particular business. Amazon, which rarely talks about behind-the-scenes business practices, did not answer questions about its sales-tax plan for Tennessee. The state's newly elected Republican governor, Bill Haslam, who once ran the e-commerce business of Saks Fifth Avenue, seemed to agree with Kiga.

While acknowledging that untaxed online sales are a growing problem for cash-strapped states, Haslam said tax collectors should not "interfere with our recruiting of Amazon to Tennessee. That's a huge priority for us," he told the Times Free Press.

Amazon charges sales tax in a handful of states where it does business: Kansas, Kentucky, New York, North Dakota and Washington. The six states where it distributes products but does not charge sales tax are Arizona, Indiana, Nevada, Pennsylvania, Texas and Virginia.

In the most audacious move yet by a state, Texas recently hit Amazon with a $269 million bill for four years of unpaid sales taxes. Amazon, which turned around and sued Texas, demanding to see the state's tax documents, says its warehouse near Dallas is an "affiliate, but not subsidiary, of the Amazon retailing entity."

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Amazon also finds itself at odds with the National Retail Federation. The trade group argues Internet-only retailers enjoy an unfair price advantage over traditional stores that collect sales tax, and it wants Congress to do something about it.

Although calls for closing the sales-tax loophole are not new, the retail federation believes it's finally making some headway with Congress. Why now? E-commerce companies did well during the economic downturn, posing more of a threat to brick-and-mortar rivals.

Amazon's worldwide sales surged nearly 30 percent in 2008 to $19 billion and topped $24 billion in 2009, two of the worst years in recent memory for U.S. retailers. The company, which almost doubled its annual profit during the same two years, plans to report 2010 results Thursday.

"More sales are taking place online, but they're going untaxed," said Craig Shearman, vice president of government affairs for the retail federation.

Economist Bill Fox, who heads the University of Tennessee's Center for Business and Economic Research, estimates that states lose about $12 billion a year from untaxed online sales.

What's more, state and local sales taxes add between 5 and 10 percent to a shopper's in-store purchases, so buying from an Internet-only merchant can offer significant savings.

"The local bookstore closes down, and the firm in Seattle keeps growing," Fox said. "If I can save 10 percent by buying something from Amazon, that's a strong incentive."

Amazon long has tried to minimize its sales-tax obligations.

Founder and Chief Executive Jeff Bezos told Fast Company magazine in 1996 that he started Amazon in Seattle partly because Washington is a small-population state, meaning he'd rather collect sales tax here than in California or New York.

"In the mail-order business, you have to charge sales tax to customers who live in any state where you have a business presence," Bezos said. "We thought about the Bay Area, which is the single best source for technical talent. But it didn't pass the small-state test."

Technically, Internet shoppers are supposed to report and pay for untaxed online purchases when they file their annual state returns, though few do.

New York legislators in 2008 passed a law requiring online retailers to collect sales taxes from state residents based on their relationships with local affiliate websites that link to products sold on their sites. In a closely watched case, Amazon is collecting New York's sales tax while a lawsuit works its way through the state court system.

Online merchants have argued that requiring them to navigate the varied rules and rates of more than 7,500 local taxing jurisdictions would be a nightmare.

To make things less complicated, the national Streamlined Sales Tax Governing Board was created a decade ago. Along with the retail federation, the group of 24 states, which includes Washington, is pushing for federal legislation that would require online merchants to collect sales taxes for states that streamline their rules.

The concept that may be gaining traction. Amazon spokeswoman Mary Osako said the company supports the goal of making tax laws "simple and harmonized" and does not oppose "a constitutionally permissible national system applied even-handedly."

"We think the elements are coming together to push this thing across the finish line," said Shearman, of the National Retail Federation. "Congress will realize the pressure is on from states to do something."

But his optimism defies conventional wisdom. Others argue Republicans in Congress are unlikely to do anything that might be interpreted as raising or adding taxes. After all, some people like not paying sales tax for online purchases, especially in a tough economy.

"It's a politically tough issue," said Fox, the University of Tennessee economist. "Congress could act on it, but it gets none of the revenues, and those who vote for it could get accused of adding taxes."

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com

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