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Originally published April 27, 2011 at 12:12 PM | Page modified April 28, 2011 at 9:29 AM

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SEC looks into Amazon's sales-tax dispute with Texas

Amazon said in a regulatory filing Wednesday the SEC is looking into its dispute with Texas, which began last September when the state hit it with a $269 million bill for four years of uncollected sales taxes.

Seattle Times business reporter

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A months-long battle between Amazon.com and Texas over whether the world's largest Internet retailer should collect sales taxes has captured the attention of the Securities and Exchange Commission.

Amazon said in a regulatory filing Wednesday the SEC is looking into its dispute with Texas, which began last September when the state hit it with a $269 million bill for four years of uncollected sales taxes.

"In March 2011, the SEC staff notified us of an inquiry concerning this assessment, and we are cooperating with the staff's inquiry," Amazon said.

The state argues that because Amazon operated a warehouse near Dallas, it should have collected sales taxes on items sold to Texas residents. Seattle-based Amazon countered that the warehouse was owned by a separate legal entity. It then went a step further and said it would close the warehouse this month.

Under a 1992 Supreme Court decision, an Internet retailer does not have to collect a state's sales tax unless it has a local physical presence, such as a store. Amazon charges sales tax in only a handful of states, one of which is Washington.

But that may be about to change. Amazon is fighting proposed legislation in Texas and other cash-strapped states that seek to make pure Internet retailers collect sales taxes, just as traditional stores must do.

In an earnings call Tuesday, Chief Financial Officer Tom Szkutak seemed to downplay the potential fallout if more states put an end to tax-free online sales. He noted that Amazon generates more than half of its revenue in places where it already collects sales or consumption taxes, including markets outside the U.S.

That contrasts with a warning by Amazon on Wednesday that additional tax obligations "could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all of our online competitors and decrease our future sales."

Separately, Amazon's stock hit an all-time high Wednesday, a day after the company posted a sharp drop in its quarterly profit and said it's spending more money on everything from new warehouses to technology upgrades.

While the first-quarter profit Amazon reported Tuesday declined by a third to $201 million, its sales rose 38 percent to $9.86 billion.

Amazon said it's spending more money to expand online and grab a bigger share of the e-commerce market.

Wall Street signaled its approval, pushing shares up $14.33, or 7.9 percent, to $196.63. That beats the stock's previous record of $191.25 set in January.

Analyst Mark Mahaney, of Citigroup Investment Research in San Francisco, offered several reasons why Amazon, unlike other Internet stocks, gets a "pass" when it reports a profit that falls below Wall Street's expectations.

For one thing, he said, Amazon's "investments are clearly from a market-share-gaining position of strength."

Also, Amazon benefits from the emergence of cloud-computing, mobile shopping devices and digital media, and "is largely unaffected by the rise of social networking," Mahaney said.

But analyst Colin Gillis, of BGC Partners in New York, has a "sell" rating on Amazon shares, citing a business slowdown in post-earthquake Japan, rising transportation costs and uncertainty about the company's ability to dominate new digital-media markets.

"It's crazy what the stock is doing," Gillis said. "It's kind of like Teflon Don — 'We can do no wrong.'"

Amazon raised another potential problem Wednesday when it disclosed that the Internal Revenue Service recently sent "Notices of Proposed Adjustment" for 2005 and 2006 relating to the company's "transfer pricing" with its foreign subsidiaries.

The IRS is proposing to increase Amazon's U.S. taxable income, which would result in about $1.5 billion in additional federal tax expenses, plus interest, for seven years beginning in 2005, the company said.

"We disagree with the proposed adjustments and intend to vigorously contest them," it said. "If we are not able to resolve these proposed adjustments at the IRS examination level, we plan to pursue all available administrative and, if necessary, judicial remedies."

In other news, Amazon said it paid founder and Chief Executive Jeff Bezos, who owns about 20 percent of the company's stock, a salary of $81,840 in 2010, the same as it has for the past decade.

Bezos, 47, also received $1.6 million to cover security costs, down slightly from the $1.7 million Amazon spent in 2009 to keep Bezos out of harm's way. Amazon's filing says it believes "all company-incurred security costs are reasonable and necessary and for the company's benefit."

In an annual letter to shareholders, Bezos talked up Amazon's investments in new technology, which he said "lead directly to free cash flow."

"Invention is in our DNA," Bezos wrote, "and technology is the fundamental tool we wield to evolve and improve every aspect of the experience we provide our customers."

A year ago, Bezos used the letter to talk up Amazon's commitment to customer service, its overseas expansion and efforts to improve online shopping for apparel and shoes.

Wednesday's jargon-infused letter might be aimed at prospective new hires as much as shareholders. Amazon is recruiting hundreds of technology workers for its expanding headquarters complex in Seattle's South Lake Union neighborhood.

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

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